Court Opinion

ID: 2997069
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:33:26.810221+00
Date Added: 2024-06-11T12:11:23.041959
License: Public Domain

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 inter-
pleader” 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 Disposi-
tion” 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 Bor-
rowing 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 agree-
ment,” 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 para-
graphs. Hanson v. McCaw Cellular Communications, Inc., 77
F.3d 663, 668 (2d Cir. 1996). “[A] contract must be inter-
preted as a whole. Sentences are not isolated units of mean-
ing, 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 doc-
uments 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 trans-
actions of a solvent concern (though not by sales in the
ordinary course of business, which do not require repay-
ment 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