Opinion ID: 416500
Heading Depth: 1
Heading Rank: 7

Heading: Ill Rev.Stat. ch. 26, Sec. 1-201(44).

Text: 2 The Security Agreement specifically recited that it was intended to secure the performance of the obligations of Libco to the secured parties, and the Security Agreement itself is mentioned as a requirement in the Stock Purchase Agreement between Libco and Leigh and Dusek. In fact, all the agreements executed on April 5, 1977 seem to have formed part of a single transaction, the transfer of ownership of Reliable from Leigh and Dusek to Libco 3 Reliable is a Delaware corporation 4 The district court analyzed this question as one of suretyship law. As Judge Marshall correctly noted, the guarantor of another's debts is subrogated to the rights of that debtor with respect to an obligation which the guarantor has discharged on his behalf. See, e.g., In re J.V. Gleason Co., 452 F.2d 1219 (8th Cir.1971); United States Fidelity & Guaranty Co. v. First State Bank of Salina, 208 Kan. 738, 494 P.2d 1149 (1972). Under this doctrine, the equitable doctrine of subrogation, one who stands surety for the debt of another receives by operation of law an equitable lien which takes priority over subsequent security interests. Id. Hence Libco argued, and Judge Marshall assumed for the sake of argument, that Reliable's Guarantee in the case at hand subrogated Reliable to Libco's rights in Reliable's own stock and thus made Reliable the equitable owner of its own stock. Appellants' argument under Section 160 depends upon this assumption This assumption, however, ignores the absence of an essential factual premise. The equitable lien arising out of the suretyship relation does not attach until the surety in fact pays the debt which has been guaranteed. See In re J.V. Gleason Co., 452 F.2d at 1224. Reliable, that is, would be in a position of equitable ownership of its own stock only after the obligation guaranteed had been satisfied. That essential event has not yet occurred. At the moment of the agreement Reliable merely obtained an equitable right which could be exercised when and if Reliable satisfied Libco's obligation under the Stock Purchase Agreement. If it paid Libco's debt, Reliable would have an equitable lien upon its own stock; and if Reliable were then to exercise that lien there would be a redemption of stock. Only at that moment would the prohibitions of Section 160 be activated. (Once the guaranteed obligation were paid by Reliable, however, Reliable's equitable right in effect to redeem its own stock would presumably be constrained by the prohibitions of Section 160.) 5 There is evidence that Libco paid itself a dividend of $100,000 within a year of its purchase of Reliable 6 Leigh and Dusek argue that Reliable did in fact receive consideration for the Guarantee, in the form of the lease, two employment contracts and covenants not to compete; and Miller's Shoes & Clothing v. Hawkins Furniture & Appliances, Inc., 300 Minn. 460, 221 N.W.2d 113 (1974), is precedent for the proposition that a corporation signing a guarantee under such facts does not sign as an accommodation maker 7 In fact, all of the elements of a classic estoppel situation are present: reliance by Leigh and Dusek upon the guarantee and a substantial change in their position, in that they gave up ownership in all of the stock of Reliable