proceeds. Section 13 provides for the application of proceeds of the
sale of collateral upon default and does not prioritize among the
three tranches.

Heller has filed an action seeking to interplead and for
declaratory judgment against Prudential and Key. Prudential has
filed an answer, affirmative defenses, a counterclaim for declaratory
judgment and a cross-claim seeking damages against Heller for breach
of fiduciary duty. Key filed an answer essentially agreeing with
Heller. All parties have filed motions for summary judgment. In
addition Heller has filed a motion to dismiss Prudential’s cross
claim for breach of fiduciary duty, contending that as a matter of
law it owed Prudential no fiduciary duty. All parties agree that the
loan agreements are unambiguous and are therefore subject to the
court’s interpretation so that the summary judgment motions present
issues of law. Kallman v. Radio Shack Corp., 315 F.3d 731, 735 (7th
Cir. 2002).

It appears to the court that Heller and Key have the best of the
argument. While Prudential is correct that, if Section 13 of the
Security Agreement was all the court had before it, the proceeds
should be equally distributed among the three tranches without any
priority. However Section 1.5(C) of the Credit Agreement, if it
applies to this case, establishes a priority for distribution, i.e.,
first, to pay off the Revolving Loan and then to pay off the term
loans. Section 13 does not foreclose the applicability of

Section 1.5(C) because this section merely establishes the order of


Paper to repay, but not necessarily prepay, the revolving loan up to
the amount the borrowing base was reduced due to the asset
disposition whether or not the Revolving Loan was due at the time.
Thus the noun “Prepayment” in the title to the subsection is inapt
and can be disregarded. Furthermore Section 9.8 of the credit
agreement provides that subsection headings are not to be given
substantive effect and not part of the agreement. The court,
therefore, agrees with Heller that Section 1.5(C) applies even though
doing so involves a “repayment.”

Prudential’s final point, that the result of MHeller’s
interpretation is illogical and inequitable, is likewise unavailing.
Assuming that Heller’s interpretation is correct, and as this opinion
shows, this court believes it is, to hold otherwise would require the
court to rewrite the parties’ agreements. This the court is
powerless to do in the absence of some defect in the negotiating
process, of which there is no claim. City of Chicago v. Fiber Optic
Corp., 222 Ill. Dec. 821, 827 (1st. Dist. 1997).

CONCLUSION
Motions for Summary Judgment

The court therefore grants the Motions for Summary Judgment
filed by Heller and Key and denies the Motion for Summary Judgment
filed by Prudential. The court declares that Heller by depositing the
proceeds from the bankruptcy sale in the registry of this court
absolves it of further obligations other than to make distribution as

ordered by the court. The court thereby declares that the proceeds

-7-


The formula by which this amount is to be distributed is the subject
of this lawsuit.
DISCUSSION
Section 1.5 (C) of the Credit Agreement provides for
“Prepayments from Asset Dispositions.” Under this provision, if
there is an asset disposition, defined as “disposition... of
any or all of the assets of Borrower . . . other than sales of

inventory in the ordinary course of business,” the borrower is to
“repay the outstanding principal balance of the Revolving Loan by the
amount of any reduction in the Borrowing Base attributable to the
Asset Disposition” before repaying the Term Loans, which are to be
repaid out of any balance remaining.

Heller and Key interpret this provision to require repayment of
the entire revolving loan before any payments are made to the Term
loans because, they contend, the entire borrowing Base has been
reduced to zero by the sale of American Paper’s assets. Prudential,
on the other had, contends that this section, by its own description
and its express terms, only applies to prepayments from proceeds from
asset dispositions and because the loans were in default and
immediately due by virtue of an acceleration clause, such a payment
would not be a prepayment. Moreover the provision only applies to
proceeds received by American, which, because the bankruptcy sale
order caused the funds to go directly to Heller, were not received by
American as required by Section 1.5(C). Prudential argues Section 13

of the Security Agreement governs the distribution of the sale


consideration for various types of claims, of which accrued and
unpaid interest is number three and principal amounts owed is number
four. None of the clauses of Section 13 seeks to prioritize among
the three tranches of debt, so Section 13 is not inconsistent with
the provisions of Section 1.5(C) if this section applies to this
case.

Prudential, as we have seen, contends that Section 1.5(C) does
not apply because (1) it only applies when American Paper receives
the cash proceeds, and here Heller was the recipient; (2) it only
applies to pre-acceleration prepayments, where here the bankruptcy
and the appointment of a receiver caused a default and acceleration
of the debt; and (3) that the consequences of Heller’s interpretation
are absurd and inequitable.

With regard to Prudential’s point number 1, the sales agreement
between American Paper and Our Sunday Visitor specifically designated
Heller as American Paper’s agent for receipt of the sale proceeds.
This was done for the good reason of simplifying the transaction.
Receipt by an agent is equivalent to receipt by the principal. ILP,
Agency, Section 65, page 501. Therefore Section 1.5 (C) is not
inapplicable for this reason.

With regard to Prudential’s point number 2, paragraph 1.5(C) is
entitled “Prepayments from Asset Dispositions.” Since the maturity
date of the Revolving Loan (and the other loans) was accelerated due
to an “[e]vent of default”, i.e., the voluntary bankruptcy and the

appointment of the receiver (See Sections 6.1 and 6.3 of the Credit



deposited with the registry of the court, together with any interest

accumulated thereon, is to be distributed as follows:

LOAN HELLER PRUDENTIAL KEY
Revolving 52.38095200% 0.0% 47.61904800%
Term A 25.10822470% 27.27272730% 47.61904800%
Term B 45.45454550% 54.54545450% 0.0%

Motion to Dismiss Count II

The court also grants Heller’s motion to Dismiss Count II of
Prudential’s counterclaim. First, since the court has adopted
Heller’s position as to contract interpretation the motion is
undoubtedly moot. Second, the agreement between Heller and
Prudential specifically provided that Heller’s agency was not to
create any fiduciary duty owned to Prudential. Prudential has not
cited any case that holds that the mere existence of an agency
relationship creates a fiduciary duty in spite of a written agreement

to the contrary. Heller on the other hand has pointed out that the

Restatement of the Law of Agency allows,for contractual disavowal of

a fiduciary relationship. Restatepfent (Second) of Agency (1958)
Section 376.
Accordingly the Motion to Difmiss is gfanted.

IT IS SO ORDERED.

Harry D. Leinenweber, Judge
United States District Court

Date: 1S,



ute OrgAfrorn( Jooi7)

United States District Court, Northern District of Illinois

Name of Assi;
or Mas

ned Judge
ate Judge

Sitting Judge if Other

Harry D. Leinenweber i
thaw Assigned Judge

CASE NUMBER |
}—

03 C 2017 9/26/2003

DATE |

CASE Heller Financial, Inc. vs. Prudential Insurance Company, et al
TITLE
[lu ihe following box (a) indicate the party filing the motion, e-g., pfaintitY, defendant, 3rd party plaintiff, and (6) slate briefly the nature
MOTION: of the motion being presented.}

DOCKET ENTRY:

qd) oO Filed motion of [ use listing in “Motion” box above.]

(2) a Brief in support of motion due

3) Oo Answer brief to motion due___. Reply to answer brief due.

(4) o Ruling/Hearing on setfor at

(5) im} Status hearing(held/continued to] (set for/re-set for] on set for at

(6) 0 Pretrial conference[held/continued to] {set for/re-set for] on set for at

1) im} Trial[set for/re-set for]on at _

(8) Q [Bench/Jury trial] [Hearing] held/continued to at

(9) Qa This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OFRCP4(m) OLocal Rule 41.4 CFRCP4!(a)\(1) OO FRCP41(a)(2).

(10) a {Other docket entry] © ENTER MEMORANDUM OPINION AND ORDER: The court grants the Motions for
Summary Judgment filed by Heller and Key and denies the Motion for Summary Judgment filed by Prudential. The court
declares that Heller by depositing the proceeds from the bankruptcy sale in the registry of this court absolves it of further
obligations other than to make distribution as ordered by the court. The court declares that the proceeds deposited with the
registry of the court, together with any interest accumulated, is to be distributed as indicated in the court’s memorandum
opinion and order, Heller’s motion to Dismiss Count II of Prudential’s counterclaim is granted.

(Hy a [For further detail see order attached to the original minute order.]

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Agreement), Prudential argues that the application of the sale
proceeds to retire the Revolving Loan cannot be considered a
“prepayment.” The word “Prepayments” is the title given to
Section 1.5 of the Credit Agreement of which 1.5(C) is a subsection.
Prepayment is a payment made in satisfaction or partial satisfaction
of a debt prior to its due date. Repayment is the act of paying back
and is not constrained as to time of payment relative to a due date.
You can repay a debt at any time whether or not it is due. Thus,
repayment would include prepayment but not vice versa. The text of
Section 1.5(C) uses the verb “repay” rather than “prepay” with
respect to payments made on the Revolving loan. If by disposing of
assets American allowed the borrowing base to decrease American was
under an obligation to “repay” so much of the proceeds of the asset
disposition that was necessary to restore the borrowing base by the
amount attributable to the asset disposition. This appears to be
required regardless of the extent of borrowing in relation to the
borrowing base. Arguably this would not be a prepayment because the
payment would then be due. On the other hand, if there are proceeds
left over after the Revolving Loan is serviced, and American did not
intend to reinvest such excess funds, they must be used to “prepay”
the term loans. Thus Section 1.5(C) appears to make a distinction
between payments to service the Revolving Loan and payments to
service the term loans.

Since the sale of the assets through the bankruptcy court

reduced the borrowing base to zero, Section 1.5(C) obligated American


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION E j L E dD

HELLER FINANCIAL, INC., a

Delaware corporation, SEP 2 § 2003
Plaintiff, JUDGE HARRY 5
. KEINE RI
US. DISTRICT COURT JUDGE 8
v. Case No. 03 C 2017
PRUDENTIAL INSURANCE COMPANY OF Hon. Harry D. Leinenweber

AMERICA, a New Jersey
corporation, and KEY CORPORATE
CAPITAL, INC., a Michigan
corporation,

Defendants.

MEMORANDUM OPINION AND ORDER
BACKGROUND

The facts in the case are not seriously disputed. Since 1994
Heller Financial, Inc. (hereinafter, “Heller”) has had agreements
with American Paper Group, Inc. (hereinafter, “American”), for the
extension of credit. There are two agreements between the parties,
a credit agreement and a security agreement. By the terms of the
credit agreement, which was amended in 1998 to increase the maximum
principal amounts, Heller agreed to extend American credit up to $43
million. The security agreement granted Heller a security interest
in and a lien upon all of American’s personal and real property. The
credit agreement established three tranches of debt: Term A loan of
up to $11 million; Term B loan of up to $22 million; and a Revolving
Loan of up to $10 million. The latter loan was intended to provide

American with a continuing source of cash that it could draw upon

He


based on formula tied to accounts receivable and inventory levels.
American could borrow, repay, and re-borrow for the life of the loan.
The two term loans bore interest, required fixed quarterly principal
payments, and were not subject to re-borrowing.

The credit agreement entitled Heller to sell participation units
in the loans, the terms of which were set forth in separate
Assignment and Acceptance Agreements. Under the terms of these
agreements Heller agreed to act as the lenders’ agent subject to the
conditions set forth in the Credit Agreement. Heller subsequently
entered into such agreements with Prudential Insurance Company
(hereinafter, “Prudential”) and Key Corporate Capital, Inc.
(hereinafter, “Key”), whereby Prudential undertook 27.27272730% of
the Term A loan and 54.54545450% of the Term B loan, and Key
undertook 47.61904800% of the Revolving loan and 47.61904800% of the
Term A loan. Heller retained the balance. The current outstanding
balances on these loans are: Revolving Loan - $5,977,732.98; Term A
loan - $6,425,000.00; and Term B Loan - $21,612,500.00. Of these
sums, approximately $14.56 million was loaned by Heller; $5.9 million
was loaned by Key; and $13.54 million was loaned by Prudential.

In November 2002, American filed a petition for Chapter 11
bankruptcy. On January 14, 2003, the Bankruptcy Court entered an
order authorizing American to sell substantially all of its assets to
Our Sunday Visitor, Inc. for approximately $13 million, and after
payment of certain expenses, amounted to net proceeds in the amount

of $11,614,444, which was to be distributed among the three lenders.