United States v. McBroom (In re Camco)

Citations: 2 B.R. 239; 22 Collier Bankr. Cas. 2d 548; 1980 Bankr. LEXIS 5692Docket: Bankruptcy No. B-70N-583

Court: United States Bankruptcy Court, E.D. Washington; January 18, 1980; Us Bankruptcy; United States Bankruptcy Court

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On December 7, 1979, a hearing was held regarding a motion for summary judgment filed by the United States, representing the Small Business Administration (SBA), under Bankruptcy Rule 756. The case involves a Blanket Loan Guaranty Agreement executed on October 11, 1968, between the SBA and Farmers Merchants Bank, allowing the Bank to make loans with partial guarantees from the SBA. If a default occurred, the Bank could demand the SBA purchase its guaranteed portion of the loan, and the SBA could require the Bank to transfer the loan's note, collateral, and instruments.

On May 21, 1970, the Bank sought SBA's guarantee for a loan to Fire Detection Service, Inc. (FDS), which the SBA approved, guaranteeing 87.5% of a $400,000 loan. This loan was also secured by guarantees from Cameo Products, Inc. and a security interest in FDS's assets. Cameo subsequently granted a security interest in its inventory and equipment to secure its obligations to the Bank. 

After FDS filed for bankruptcy, the SBA reimbursed the Bank $352,264.36 for its guaranteed loan portion. The Bank then assigned its secured interests to the SBA in exchange for a Certificate of Interest. Both FDS and Cameo filed for bankruptcy in 1971. On October 14, 1977, the SBA filed a complaint to determine its and the Bank's interests in $29,187.95 held by the Trustee from the sale of Cameo’s property.

The primary issue is the distribution of the dividend held by the Trustee. The SBA claims it is entitled to 87.5% of the dividend based on the Master Agreement, while the Bank argues that the proceeds from the collateral were for a separate debt, denying the SBA's claim to these funds.

The Bank asserts that its security interest in FDS' equipment, machinery, contract rights, and life insurance transferred to the SBA, but the later security interest in Cameo's inventory, tools, and equipment did not, as it was not intended to secure the $400,000 loan. The Bank argues there is a material issue regarding whether there was an intent to provide additional security for the SBA on the FDS loan, contending that summary judgment should be denied. The Court must assess if there is a genuine issue of material fact, placing the burden of proof on the moving party, and must view facts in favor of the non-moving party. Summary judgment is appropriate for disputes involving unambiguous contract interpretations.

The Master Agreement between the Bank and the SBA establishes that any security received under the FDS loan flows to the SBA, and it is undisputed that this includes the Bank's security interest in FDS' assets. However, the Bank argues that the Cameo security agreement was meant for a previous, non-guaranteed loan, not the $400,000 loan. The Court finds that the Cameo security agreement does, in fact, secure all obligations owed by Cameo to the Bank. The key issue remains that the $400,000 loan was issued to FDS, not Cameo. The necessary connection is established through three documents, including a guarantee from Cameo for any indebtedness owed by FDS to the Bank, which obligates Cameo to pay the SBA loan, thus linking the security agreement to the SBA.

Two key instruments, dated September 25, 1969, and June 29, 1970, establish Cameo's unconditional guarantee of a $400,000 loan, obligating Cameo to repay debts incurred by FDS. The court affirms the Bank's interpretation that the phrase "in any loan guaranteed thereunder" in the Master Agreement limits the security for the SBA to the guaranteed loan, indicating that the security interest in Cameo's collateral serves as partial security for this loan. The court finds the relevant documents unambiguous, ruling that the security interest in Cameo's inventory indeed flows to the SBA. The Bank's reliance on the Assignment of Security Agreement, which does not mention specific collateral, does not negate the SBA's valid interest. The Master Agreement allows the Bank to demand payment from the SBA upon FDS's default, obligating the Bank to transfer all related instruments without recourse. The court concludes that the Bank may have breached its duty to act in good faith regarding the transfer of security and that this does not diminish the SBA's security interest. The court grants the motion for summary judgment, directing payment of $25,539.46 to the SBA and $3,648.49 to the Bank, with the SBA entitled to interest at six percent per annum on the awarded amount from September 28, 1977, until the order is entered. Counsel for the plaintiff is instructed to submit an appropriate order.