In re Integrated Argi, Inc., No. 01-84536 (Bankr. C.D. Ill. 2/26/2007)

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IN RE: INTEGRATED AGRI, INC., Debtor RICHARD E. BARBER, Chapter 7 Trustee for INTEGRATED AGRI, INC., Plaintiff, v. MICHAEL W. MAULSBY, KENT A. NIXON, STEVEN L. WESTBAY, Defendants.

No. 01-84536.

Adv. No. 03-8261.

United States Bankruptcy Court, C.D. Illinois.

February 26, 2007.

OPINION

THOMAS PERKINS, Bankruptcy Judge.

This matter is before the Court on the Motion for Summary Judgment filed by the Plaintiff, Richard E. Barber (TRUSTEE), Trustee for the Chapter 7 Debtor, Integrated Agri, Inc. (IAI) as to Count I, only, of the 3-count First Amended Complaint. This Court previously issued an opinion in this adversary proceeding setting forth the facts that form the basis of the TRUSTEE'S claim. In re Integrated Agri, Inc., 313 B.R. 419 (Bankr.C.D.Ill. 2004). They are briefly summarized as follows.

As of November, 1999, the stock of IAI was owned by Michael W. Maulsby, Kent A. Nixon, Steven L. Westbay (collectively the "DEFENDANTS") and Charles G. Westbay.¹ On November 30, 1999, the four entered into a Purchase Agreement whereby the DEFENDANTS agreed to buy out Charles' interest in IAI for a total sum of $549,500. The Agreement called for Charles to be paid $199,500 immediately with the balance of $350,000, plus interest, payable in monthly installments of $7,138.69. The Agreement also represents that Charles personally guaranteed certain obligations of IAI to Case Credit Corporation (CASE) and provides for the DEFENDANTS to indemnify him from any liability on those guaranties.

In their Answers, the DEFENDANTS admit the following allegation of the First Amended Complaint:

Maulsby, Nixon and Westbay were advanced funds by Debtor (IAI) on an unsecured basis which they utilized to make the payments required by the Purchase Agreement to purchase the shares of stock of Charles. The advancements to Maulsby, Nixon and Westbay are reflected on Debtor's financial statements and tax returns as notes receivable to related parties ("Stockholder Notes").

Although the amounts were not individually specified in the First Amended Complaint, the Motion for Summary Judgment seeks judgment against Steven Westbay for $197,725 and against Maulsby and Nixon for $72,205 each.

Although the DEFENDANTS now claim that no promissory notes were ever signed, they do not dispute that they each borrowed funds from IAI to make the payments to Charles and that the loans have not been repaid.² Neither do they dispute that the amounts of the loans are $197,725 to Steven Westbay and $72,205 each to Maulsby and Nixon. It is a given that a claim for an unpaid loan owed to a debtor as of the petition date is property of the estate under Section 541(a)(1) that the Chapter 7 trustee has a duty to collect under Section 704(a)(1).

In their Answers and Responses to the Motion for Summary Judgment, the DEFENDANTS raised certain defenses that may be summarized as follows:

1. Statute of Limitations: That the claim is time barred.

2. Release: That the DEFENDANTS" liability for the loans has been validly released by CASE, the creditor that held a prepetition security interest therein.

3. Estoppel: That because no notes were ever signed by the DEFENDANTS, the TRUSTEE is not the holder of any notes; the theory pleaded in the First Amended Complaint is limited to a collection of notes; without signed notes, the repayment obligations are open accounts that the TRUSTEE is estopped from pursuing.

4. Setoff: That the DEFENDANTS are entitled to offset the amounts paid CASE in settlement of liability on their personal guaranties of IAI's debts to CASE.

5. Abandonment: That the TRUSTEE abandoned the loan repayment claims against the DEFENDANTS on December 31, 2001, when he filed a Notice of Partial Abandonment.

Limitations

______The first issue that must be addressed is the contention that the TRUSTEE'S cause of action is time-barred. The DEFENDANTS incorrectly assert the limitations provision of Section 546(a), which applies only to actions under Section 544, 545, 547, 548 or 553. 11 U.S.C. § 546(a). The TRUSTEE is not exercising an avoiding power. Rather, the TRUSTEE, as successor to IAI, is asserting a contract claim that IAI held against the DEFENDANTS as of the petition date.

The time for bringing such claims is governed by Section 108(a) which provides as follows:

If applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of—

(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or

(2) two years after the order for relief.

11 U.S.C. § 108(a). A two-step analysis is required. First, it must be determined whether the applicable non-bankruptcy limitations period had expired prepetition. If so, the claim is barred. If not, the second step requires the determination of the deadline without regard to the bankruptcy filing. The claim may be timely asserted within the longer of that deadline or two years after the order for relief.

The parties agree that Illinois law provides the applicable statute of limitations. See Cox v. Kaufman, 212 Ill.App.3d 1056, 1062, 571 N.E.2d 1011, 1015 (Ill.App. 1 Dist. 1991) (law of forum state controls procedural questions such as limitations period). Under Illinois law, actions on unwritten contracts must be commenced "within 5 years next after the cause of action accrued." 735 ILCS 5/13-205. For actions on unwritten contracts, the 5-year period starts to run on the date of breach. Clark v. Robert W. Baird Co., Inc., 142 F.Supp.2d 1065, 1075 (N.D.Ill. 2001); Hermitage Corp. v. Contractors Adjustment Co., 166 Ill.2d 72, 77, 651 N.E.2d 1132, 1135 (1995). Where the breach concerns the failure to pay money, the statute begins to run when payment becomes due. Kozasa v. Guardian Elec. Mfg. Co., 99 Ill.App.3d 669, 673, 425 N.E.2d 1137, 1142 (Ill.App. 1 Dist. 1981).

There is no evidence in the record as to when, if at all, DEFENDANTS" obligation arose to repay the stockholder loans. Under Section 108(a), for the TRUSTEE to have a live claim, the limitations period must not have expired before the petition date, which was October 23, 2001. So unless the breach occurred prior to October 23, 1996, the limitations period could not have expired prepetition. In fact, since the stockholder loans were not made until late 1999, there is no question that the actions were live when IAI filed its petition.

The initial complaint to collect the loans was filed by the TRUSTEE on November 14, 2003, more than 2 years after IAI's voluntary Chapter 11 petition, which constitutes the order for relief. 11 U.S.C. § 301. Although the case was converted to Chapter 7 on November 16, 2001, which constitutes an order for relief under Chapter 7, the conversion did not effect a change in the date of the initial order for relief for purposes of Section 108. See 11 U.S.C. § 348(a) and (b). Accordingly, since the complaint was filed more than 2 years after the applicable order for relief, the TRUSTEE gains no extension of time by operation of Section 108(a)(2) and must rely solely on the state limitations period.

So, the TRUSTEE is stuck with the rule set down by Section 108(a)(1) which means his complaint, to be timely, must have been filed within 5 years of the breach. Working backward from the filing of the Complaint, the breach must have occurred no earlier than November 14, 1998. Since the loan was not made until late 1999, and it is impossible for the breach to have predated the loan. Therefore, no matter when the breach occurred, the TRUSTEE'S action was timely filed.

Undocumented Loans Are General Intangibles

The Court will next resolve the dispute over how the undocumented loans should be classified from a UCC Article 9 perspective. The DEFENDANTS do not dispute that they borrowed funds from IAI for the purpose of paying Charles his buyout payments. Neither do they contend that the absence of promissory notes or other written evidence of indebtedness renders the loans uncollectible or unenforceable. The DEFENDANTS assert that the asset of IAI that is their obligation to repay the loans is properly characterized as an open account. The TRUSTEE characterizes it as a particular kind of general intangible called a payment intangible. The TRUSTEE is correct.

The UCC Article 9 definition of "account" expressly excludes "rights to payment for money or funds advanced." 810 ILCS 5/9-102(a)(2). "Instrument" requires there to be a negotiable instrument or other writing that evidences the right to payment. 810 ILCS 5/9-102(a)(47). Thus the asset at issue is neither an account nor an instrument.

"General intangible" is the residual category of personal property not included in other defined categories, and includes "payment intangibles." 810 ILCS 5/9-102(a)(42). "Payment intangible" means a general intangible under which the account Debtor's principal obligation is a monetary obligation. 810 ILCS 5/9-102(a)(61). The Official Comment to Section 9-102 gives the following example of general intangible: the right to payment of a loan of funds that is not evidenced by an instrument. UCC § 9-102 Comment para. 5.d. Based on the plain language of the statute, as well as the Official Comments, it is clear that the DEFENDANTS" obligations to repay the loans are properly characterized as general intangibles.³

Estoppel

The DEFENDANTS assert an estoppel argument claiming that the TRUSTEE initially sued to enforce written promissory notes, not undocumented loans, and should be estopped from proceeding. Specifically, they accuse the TRUSTEE of violating the "mend the hold" doctrine, which is the wrestling-derived name of a common law doctrine that limits the right of a party to a contract suit to change his litigating position. Harbor Ins. Co. v....