Court Opinion

ID: 2994650
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:15:52.292818+00
Date Added: 2024-06-11T11:45:21.922313
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-2363

IN RE:
HOLSTEIN MACK & KLEIN, a partnership,

Debtor.

AMERICAN NATIONAL BANK & TRUST CO.
OF CHICAGO,

Plaintiff-Appellee,

v.

ROBERT A. HOLSTEIN & ASSOCIATES, P.C.,

Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern
Division.
No. 98 C 8141--John A. Nordberg, Judge.

Argued January 13, 2000--Decided November 14,
2000

  Before BAUER, POSNER, and ROVNER, Circuit
Judges.

  ROVNER, Circuit Judge. Robert Holstein
was a principal in the now-defunct
Chicago law firm of Holstein Mack & Klein
("HMK"). When that firm dissolved in
1996, it owed the American National Bank
and Trust Company of Chicago ("ANB" or
"the bank") more than $1.5 million. After
litigation over the debt had commenced,
the bank entered into a forbearance
agreement with, among others, Robert
Holstein and his new firm, Robert A.
Holstein & Associates ("RAHA"). In
exchange for the forbearance, the bank
was given a secured interest in the fees
that RAHA earned during the term of that
agreement. RAHA and the bank also agreed
to divide the fees realized from certain
cases in which RAHA had succeeded HMK as
counsel. Shortly after the agreed-upon
forbearance period expired, RAHA was
awarded substantial fees in one of these
cases. The bank claims entitlement to the
entire award based on the expiration of
the forbearance period and its security
interest in RAHA’s accounts receivable.
RAHA, on the other hand, contends that it
remains entitled to a quarter of the
award based on the language of the fee-
sharing provision, which calls for
division of the fees regardless of when
those fees are received. The bankruptcy
and district courts found in favor of the
bank, as do we.

I.

  Until its dissolution, HMK principally
engaged in personal injury and class
action litigation. Beginning in 1989, ANB
made a number of loans to HMK and of
course took a security interest in the
firm’s property, including its accounts
receivable. In 1996, when HMK defaulted
on its loan obligations, ANB terminated
the firm’s line of credit and the firm
dissolved. By this time, HMK owed the
bank more than $1.5 million. ANB sued HMK
and its principals in state court, and in
furtherance of its security interest, the
bank signaled that it planned to contact
HMK’s former clients and have them pay
any fees they owed the defunct firm to
ANB directly. This did not bode well for
the firm’s principals, who had taken many
of HMK’s clients with them when the firm
dissolved.

  Settlement negotiations ensued and
culminated in a January 3, 1997
forbearance agreement between ANB, HMK,
Holstein, and RAHA, among other parties.
In that agreement, the parties
acknowledged that the loans ANB had
extended to HMK were in default and the
entire amount of HMK’s debt was due and
payable at once. They also confirmed that
the bank’s security interest in HMK’s
accounts receivable, as well as the
guaranties given by HMK’s principals,
remained in full force and effect.
Furthermore, paragraph 13 of the
agreement granted to ANB a new, first-
priority security interest in RAHA’s
"accounts, chattel paper, contract
rights, and general intangibles" insofar
as they arose from professional services
that the new firm provided during the
period of the forbearance agreement.
  In exchange for the affirmation of
existing obligations and the new interest
in RAHA’s receivables, ANB agreed
temporarily to forbear from the full
exercise of its rights to collect on the
overdue debt. It consented to a stay of
the two collection actions that were
pending in state court, and it agreed to
lengthen the time given HMK and its
principals to make good on the debt.
para.para. 2, 11, 14.

  The bank also gave RAHA access to monies
to which ANB would otherwise have been
entitled to lay claim, in whole or in
part, pursuant to its security interests.
Approximately $135,000 remained in HMK’s
existing account with ANB, for example.
Rather than taking all of this money to
reduce the outstanding debt, the bank
took only $45,000. The remaining $90,000
was transferred to a new account for RAHA
at ANB, which RAHA subsequently used to
handle day-to-day operating expenses. See
para. 12. The agreement also provided for
the sharing of fees received by HMK and
RAHA (after the associated costs were
paid) according to percentages specified
in the agreement. para. 16. Paragraph
16(a) of the agreement provided that
where the net fees exceeded $100,000, the
bank would take 75 percent, while RAHA
would take 25 percent. Paragraph 16(e),
which lies at the heart of the instant
dispute, specified that with respect to
certain pending lawsuits identified in an
attachment to the agreement, the fees
paid to HMK and RAHA "shall be
distributed" between ANB and RAHA in
accordance with the fee-sharing
arrangement "without regard to the date
upon which the [money] is received . . .
." (We shall refer to this as the
"[whenever] received" provision of the
agreement.) The upshot of these
provisions was that RAHA obtained access
to vital working capital (by ANB’s
account, some $400,000) to see the firm
through its early days as a spinoff from
the defunct HMK.

  Provided that no further defaults
occurred, the forbearance period was
originally to have expired no later than
June 30, 1997. para. 10. By that time, it
was hoped, HMK and its principals would
have paid off HMK’s outstanding debt or,
in the alternative, the parties would
have extended the agreement. para. 11.
The parties in fact did extend the term
of the forbearance period for at least
two months, through August 31, 1997. In
late September, however, ANB notified HMK
and RAHA that the forbearance period had
expired. Paragraph 38 of the agreement
made clear what the bank’s rights were in
this circumstance: HMK’s liabilities
would become due and payable immediately,
and ANB would be entitled to pursue all
of the rights and remedies available to
it under the original loan agreements,
the forbearance agreement, and the
Illinois Commercial Code.

  One of the cases listed in the
forbearance agreement from which net fees
were to be shared by the bank and RAHA
"[whenever] received" was a lawsuit that
had been pending in the Circuit Court of
Cook County, Illinois, since 1992 under
the name Trucway v. GECAL. That case
eventually was settled, and in a series
of orders entered in July, August, and
September 1997, the state court approved
a fee award of just under $700,000,
payable jointly to both HMK and RAHA.
Payment of the fees was delayed, however,
by uncertainty as to who had a right to
claim those fees. HMK’s share of the
award--$469,279.48--was ultimately turned
over to ANB in January 1998. The
appropriate disposition of RAHA’s portion
of the net fees--which came to
$108,696.29--remained in controversy,
however, and that sum was placed in
escrow. There was no dispute that RAHA
earned its share of the Trucway fees
during the term of the forbearance
agreement and that, as a result, ANB had
a security interest in those fees that
the bank could enforce once the period of
forbearance concluded. Notwithstanding
that interest, RAHA believed that it
remained entitled to a 25-percent
allocation of those fees under Paragraph
16(a) and (e) of the agreement.

  The bankruptcy court and the district
court each concluded that ANB was
entitled to take the full amount of the
fees awarded to RAHA. In the bankruptcy
court’s view, the forbearance agreement
granted ANB a secured interest in any and
all fees that RAHA earned during the life
of the agreement. That interest
necessarily extended to the fees that
were allocated to RAHA under Paragraph
16(a). In other words, RAHA had a right,
so long as the forbearance period lasted,
to 25 percent of the fees awarded to it
in the Trucway litigation, but that
allocation was still subject to ANB’s
security interest. Consequently, once the
forbearance term expired, the bank was
free to enforce its interest and take
RAHA’s entire share of the Trucway fees:

[This] is the only reading that will give
effect to the Agreement’s provisions
without adding new restrictive terms to
which the parties did not agree. For
example, it is significant that nothing
in the Agreement excludes fees placed in
the RAHA account pursuant to para. 16(a)
from ANB’s security interest. It should
also be noted that prior to entering into
the Agreement, ANB already had a security
interest in HM&K’s share of any fee
award. Thus, the only reason for creating
the new security interest in para. 13 of
the Agreement would be to allow ANB to
proceed against RAHA’s portion of fee
awards.

American Nat’l Bank & Trust Co. of
Chicago v. Law Offices of Robert A.
Holstein & Assocs., P.C. (In re Holstein
Mack & Klein), Adv. No. 98 A 00159,
Memorandum Decision, at 10 (Bankr. N.D.
Ill. Nov. 18, 1998) (Lefkow, J.). The
district court agreed. No. 98 C 8141,
1999 WL 284721 (N.D. Ill. April 28)
(Nordberg, J.).

II.

  RAHA’s appeal turns on the proper
construction of the terms of the
forbearance agreement. As such, it
presents a question of law, and our
review of the decisions below is de novo.
E.g., Bourke v. Dun & Bradstreet Corp.,
159 F.3d 1032, 1036 (7th Cir. 1998).

  RAHA’s principal argument is
straightforward. Under Paragraph 16(a) of
the agreement, RAHA had a right to 25
percent of the net fees it realized in
the Trucway litigation and the bank had a
right to 75 percent of those fees. RAHA
acknowledges that Paragraph 13 granted to
ANB a security interest in the fees that
RAHA earned during the life of the
agreement, including the Trucway fees,
and that the bank was free to enforce
that interest once the forbearance period
expired. But in RAHA’s view, ANB’s
security interest is effectively limited
by the language in Paragraph 16(e)
indicating that fees realized from
Trucway and the other identified cases
"shall be distributed" according to the
formula specified in Paragraph 16(a)
"without regard" to when those fees were
received. (Emphasis supplied.) The sole
purpose and effect of this "[whenever]
received" clause, in RAHA’s view, was to
make clear that RAHA was entitled to a
25-percent allocation even if the fees
were received after the forbearance term
had expired. As RAHA sees things, then,
one can permit ANB to enforce its
security interest by taking RAHA’s 25-
percent allocation of the Trucway fees
only by reading Paragraph 16(e) out of
the contract altogether.
  We disagree. As RAHA concedes, Paragraph
13 granted ANB a security interest in the
fees that RAHA earned during the life of
the forbearance agreement, and "[t]he
sec. 13 security interest, on its face,
unambiguously applies to the disputed
Trucway fees." RAHA Br. 6. Possessed of
that interest, ANB had a right under
Paragraph 38 to reach RAHA’s share of the
Trucway fees once the forbearance period
had come to an end. Nothing in either
Paragraph 13 or Paragraph 38 restricted
the bank’s rights in that regard. Nor do
we find such a limitation in Paragraph
16(e). Paragraph 16 says nothing at all
about ANB’s security interest. It simply
serves to allocate to RAHA a share of the
fees awarded in Trucway and like cases.
So long as the forbearance period
continued, RAHA would enjoy the use of
those fees, much as ANB had consented to
grant RAHA the use of $90,000 of the
funds left in HMK’s account with the
bank. But even if we assume, as RAHA
argues, that fees in these cases were to
be divided as specified by Paragraph 16
not only during the period of
forbearance, but after that period as
well, the percentage of such fees
allocated to RAHA was still subject to
ANB’s security interest. Thus, assuming
that RAHA retained the right to a 25-
percent distribution of the Trucway fees
once the forbearance period had expired,
ANB had the right, by virtue of its
security interest, to step in and collect
RAHA’s percentage, just as the bank had
the right to take any fees that RAHA
clients owed to the firm for work it
performed during the forbearance period.
para.para. 13, 38; see 810 ILCS 5/9-502.
In the exercise of its discretion,
perhaps, ANB might have elected not to
claim RAHA’s share of the Trucway fees.
Or perhaps other assets might have proven
sufficient to satisfy the outstanding
debt. In any case, whatever right RAHA
had to an allocation of the Trucway fees,
the bank’s undisputed security interest
in that allocation gave it the right,
upon the close of the forbearance period,
to keep those fees./1

  RAHA secondarily and alternatively
argues that if the "[whenever] received"
clause does not resolve what it perceives
to be the conflict between paragraphs 13
and 16(e) of the agreement, then there is
an ambiguity as to the relationship
between the two provisions which opens
the door to parol evidence as to the
parties’ understanding of the agreement.
See Bourke, 159 F.3d at 1036-37. We
discern no ambiguity in the agreement,
however. Whatever questions Paragraph
16(e) might raise as to RAHA’s right to
receive its allocated percentage of
attorney fee awards after the forbearance
period ended are answered by Paragraphs
13 and 38, which granted ANB a security
interest in those fees together with the
right to enforce that interest. Nothing
in the contract remotely suggests that
this interest was anything less than a
full, first-prior security interest that
ANB could enforce in the usual ways.
Thus, once the bank was no longer
contractually obligated to forbear,
RAHA’s right to a 25-percent allocation
of the Trucway fees was really a right in
name only, wholly subordinate to the
bank’s right to enforce its security
interest.

III.

  Under the plain terms of the forbearance
agreement, ANB was entitled to take
RAHA’s share of Trucway fees in
furtherance of the bank’s security
interest, as both the bankruptcy and
district courts concluded.
AFFIRMED

/1
We need not consider whether the bank was enti-
tled to reach other funds allocated to RAHA under
the agreement, including monies that had already
been distributed to the firm during the forbear-
ance period.