In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 03-3871

HELLER FINANCIAL, INC.,

Plaintiff-Appellee,

v.

PRUDENTIAL INSURANCE COMPANY OF AMERICA,

Defendant-Appellant,

v.

KEY CORPORATE CAPITAL, INC.,

Defendant-Appellee.

____________

Appeal from the United States District Court for

the Northern District of Illinois, Eastern Division.

No. 03 C 2017—Harry D. Leinenweber, Judge.

____________

ARGUED MAY 17, 2004—DECIDED JUNE 14, 2004

____________

Before BAUER, POSNER, and EASTERBROOK, Circuit Judges.

POSNER, Circuit Judge. This interpleader action, in which

the substantive issues are governed by Illinois law, turns on

the interpretation of a loan agreement. The facts are not in

dispute. In a nutshell: Heller agreed to lend American Paper

Group, a manufacturer mainly of envelopes used for
2 No. 03-3871

collecting donations at church services, up to $43 million,

part in the form of term loans secured by APG’s fixed assets

and part in the form of a revolving-credit facility secured by

inventory, accounts receivable, cash, and any other assets

that fluctuate with sales. Heller sold a share in the

revolving-credit facility to Key and shares in the term loans

to both Key and Prudential. As a result, Heller and Key

owned shares in both types of loan, but Prudential just

owned a share of the term loans.

APG went broke, and its assets were sold in a bankruptcy

sale for $13 million, which was less than the amount owed

on the loans. The proceeds were paid to Heller as the agent

of the lenders, and after depositing the proceeds in the

registry of the district court Heller filed suit under the

federal interpleader statute, 28 U.S.C. § 1335, for a judicial

determination of the division of the proceeds among the

three lenders. Although Heller is not a neutral stakeholder,

neutrality is not required for a suit “in the nature of interpleader” authorized by the federal interpleader statute, 28

U.S.C. § 1335(a); State Farm Fire & Casualty Co. v. Tashire, 386

U.S. 523, 532 n. 9 (1967); Indianapolis Colts v. Mayor & City

Council of Baltimore, 733 F.2d 484, 486 (7th Cir. 1984); Bradley

v. Kochenash, 44 F.3d 166, 168 (2d Cir. 1995); Ashton v.

Josephine Bay Paul & C. Michael Paul Foundation, Inc., 918 F.2d

1065, 1069 (2d Cir. 1990), though since all three lenders are

citizens of different states, the suit could equally well be

maintained under the ordinary diversity jurisdiction. 28

U.S.C. §§ 1332(a)(1), (c)(1). We note as a detail that the

bankruptcy court that handled APG’s bankruptcy also had

jurisdiction over the allocation of the proceeds of the

bankruptcy sale among the three lender-creditors. 28 U.S.C.

§ 1334(b); In re FedPak Systems, Inc., 80 F.3d 207, 213-15 (7th

Cir. 1996); In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir. 1987).

We don’t know why that court failed to exercise that

jurisdiction.
No. 03-3871 3

The district judge ruled that Heller and Key are entitled to

repayment of the entire revolving loan first, with the

remaining proceeds from the sale of APG’s assets to be

allocated to the term loans and divided among the three

lenders in proportion to their shares of those loans.

Prudential argues that the entire $13 million in proceeds

should be shared among the three lenders in proportion to

their shares in all the loans added together. Key is on

Heller’s side of the dispute rather than Prudential’s because

it has a share of the revolving loan as well as of the term

loans.

The judge based his ruling on a provision of one of the

contracts that defined the relation between the lenders and

APG, the two contracts together constituting what we are

calling the “loan agreement.” The provision on which the

judge relied, section 1.5(C) of the “credit agreement,” is

captioned “Prepayments from Asset Dispositions” and its

first sentence states that “Immediately upon receipt of Net

Proceeds [i.e., net of expenses] in excess of $250,000 . . .

Borrower shall repay the outstanding principal balance of

the Revolving Fund by the amount of such reduction in the

Borrowing Base attributable to the Asset Disposition giving

rise to such Net Proceeds.” The “Borrowing Base” is a

measure of the value of APG’s inventory and other property

available to secure the revolving loan. An “Asset Disposition” is defined as a sale of assets other than in the ordinary

course of business. The reason that a sale in the ordinary

course does not affect the Borrowing Base and so does not

trigger any obligation to pay down the revolving loan is that

such a sale is unlikely to affect the value of the collateral for

the loan; the asset sold (a church collection envelope, in this

case) is quickly replaced by an equivalent asset in order to

maintain the borrower’s inventory. Section 1.5(C) goes on to

authorize APG to reinvest the remaining Net Proceeds of an

Asset Disposition (i.e., those that don’t have to be repaid in
4 No. 03-3871

order to maintain the Borrowing Base at the required level).

The section continues that any Net Proceeds that are neither

used to pay down the revolving loan nor reinvested “shall

[be used to] prepay the Term Loans in an amount equal to

the remaining Net Proceeds of such Asset Disposition.”

When APG went broke and its assets were sold, the $13

million proceeds of the sale were, Heller argues and the

district judge agreed, “Net Proceeds” that had to be used to

pay off the revolving loan in its entirety because the Borrowing Base had been reduced to zero—APG no longer had

any inventory or other assets with which to secure the loan.

Prudential argues that section 1.5(C) does not apply when

the borrower goes out of business. Prudential directs us to

section 13 of the other contract that defines the relation

between the lenders and the borrower, the “security agreement,” which provides that if there’s a default the proceeds

of any sale of the collateral securing the loans shall (after

payment of certain expenses) be applied “to the principal

amounts of the Secured Obligations outstanding.” No

distinction is made between the revolving loan and the term

loans.

Both Heller and Prudential (we can ignore Key) argue

absurdly that the two contracts constituting the overall loan

agreement are perfectly clear on their face, and consistent

with this position neither party attempted to present any

evidence that might be used to disambiguate a contract that

is not clear on its face, evidence for example of how similar

conflicts between revolving and term lenders are typically

resolved. It is true that section 1.5(C) of the credit agreement

and section 13 of the security agreement taken separately

are clear within their respective domains. But the domains

overlap. Section 1.5(C) is about the revolving loan and

section 13 is about insolvency, and it is unclear which

governs the repayment of the revolving loan in the event of

insolvency.
No. 03-3871 5

To say that a contract is clear on its face because all its

clauses taken separately are clear is as sensible as saying

that a sentence must be clear if each of the words in it is

clear. The clarity of a written contract is a property of the

entire contract, not of isolated words, sentences, or paragraphs. Hanson v. McCaw Cellular Communications, Inc., 77

F.3d 663, 668 (2d Cir. 1996). “[A] contract must be interpreted as a whole. Sentences are not isolated units of meaning, but take meaning from other sentences in the same

document.” Beanstalk Group, Inc. v. AM General Corp., 283

F.3d 856, 860 (7th Cir. 2002) (citations omitted). The fact that

the clauses at issue in this case appear in separate documents of a multidocument loan agreement is a further clue

that a purely semantic approach to interpretation is likely to

fail.

One of the default rules in insolvency (that is, a rule that

governs only if there is no express provision to the contrary,

as distinct from a mandatory rule) is that creditors of the

same class share pro rata in any proceeds available to repay

them. 11 U.S.C. § 726(b); Begier v. IRS, 496 U.S. 53, 58 (1990);

Warsco v. Preferred Technical Group, 258 F.3d 557, 564 (7th

Cir. 2001); United States v. Sabbeth, 262 F.3d 207, 214 (2d Cir.

2001). So if there are two creditors in the same class, one

owed $100,000 and the other $400,000, and $50,000 worth of

assets of the debtor is available to pay them, the first

creditor gets $10,000 and the second $40,000—proportional

equality. Another pertinent default rule, however, is that

entitlements in bankruptcy mirror those outside, e.g., Butner

v. United States, 440 U.S. 48 (1979); Kham & Nate’s Shoes No.

2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1361 (7th Cir.

1990), and we know from section 1.5(C) of the credit

agreement that proceeds from sales of APG’s assets are to be

used first to reduce the revolving loan. The second default

rule normally trumps, because it places creditors in different

classes. But section 13 of the security agreement denotes
6 No. 03-3871

Heller, Prudential, and Key as creditors of the same class,

namely holders of secured obligations. The default rules

cancel, and we have to choose between the two clauses of

the loan agreement without those crutches.

Our best guess (no stronger statement is possible) is that

section 1.5(C) does not give the revolving loan priority over

the term loans in bankruptcy. That section says that when

APG receives proceeds in excess of expenses as the result of

a sale that reduces the collateral securing the revolving loan,

then so much of the proceeds must be used to pay down

that loan as is necessary to restore the collateral to

its previous level, while any proceeds that remain after that

is done may either be reinvested by APG or used to

pay down APG’s term loans. It seems that section 1.5(C) is

concerned with credit adjustments necessitated by the transactions of a solvent concern (though not by sales in the

ordinary course of business, which do not require repayment of the revolving loan in whole or part because they are

unlikely to impair the loan’s collateral), one that remains in

business, needing revolving credit, after the adjustments as

before, rather than with a situation in which the loan

becomes due and owing as a result of the borrower’s

defaulting. As long as the borrower continues to draw on

the revolving loan, he has to pay it down before the term

loans whenever he receives net proceeds from a sale that

impairs the revolving loan’s collateral. But once the loan has

been called because the borrower has defaulted, there is no

danger of his continuing to draw on the revolving loan

without furnishing adequate collateral. He has no further

right to that loan, just as he has no further right to the term

loans. All the loans become due and owing all at once, and

in this situation there is no reason to give preference to one

type of loan over the other. The parties could have written

into the security agreement a provision subordinating the

term loans to the revolving loan, 11 U.S.C. § 510(a), but they

didn’t.
No. 03-3871 7

Our analysis suggests that had the parties thought about

the effect of bankruptcy on the respective rights of the

revolving and the term lenders, they would have wanted

section 13 of the security agreement to govern. It’s odd that

they didn’t think about that effect, since both provisions

appear to be standard components of a loan agreement,

since loan packages consisting of term and revolving loans

are common, and since bankruptcy is common. The parties

couldn’t enlighten us on this score, and we cannot find any

cases construing a similar set of provisions. 

Heller and Key, we conclude, are entitled only to their

proportionate shares of the entire proceeds from the $13

million sale, treating all the loans as a lump. The judgment

is therefore reversed and the case remanded for further

proceedings consistent with this opinion.

REVERSED AND REMANDED.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—6-14-04