Case Nos , UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Transcription

1 Case Nos , UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT IN RE: SARAH MICHAELS, INC., SARAH MICHAELS, LLC, and FASMA, LLC, CPC ACQUISITION, INC., v. Debtors. Plaintiff-Appellee, Cross-Appellant, BRENDA P. HELMS, not individually but as Chapter 7 Trustee of the Estate of Sarah Michaels, Inc., Sarah Michaels, LLC, and Fasma, LLC, Defendant-Appellant, Cross-Appellee. Appeal From the United States District Court For The Northern District of Illinois Case No. 07-C-702 The Honorable George W. Lindberg, District Judge PRINCIPAL AND RESPONSE BRIEF AND SUPPLEMENTAL APPENDIX OF PLAINTIFF-APPELLEE, CROSS-APPELLANT CPC ACQUISITION, INC. Ralph J. Schindler, Jr. (Counsel of Record) Law Office of Ralph J. Schindler, Jr. 53 West Jackson Boulevard, Suite 818 Chicago, IL Telephone: (312) Facsimile: (312) Attorneys for Plaintiff-Appellee, Cross-Appellant, CPC Acquisition, Inc.

2 Appellate Court No: Short Caption: CIRCUIT RULE 26.1 DISCLOSURE STATEMENT To enable the judges to determine whether recusal is necessary or appropriate, an attorney for a non-governmental party or amicus curiae, or a private attorney representing a government party, must furnish a disclosure statement providing the following information in compliance with Circuit Rule 26.1 and Fed. R. App. P The Court prefers that the disclosure statement be filed immediately following docketing; but, the disclosure statement must be filed within 21 days of docketing or upon the filing of a motion, response, petition, or answer in this court, whichever occurs first. Attorneys are required to file an amended statement to reflect any material changes in the required information. The text of the statement must also be included in front of the table of contents of the party's main brief. Counsel is required to complete the entire statement and to use N/A for any information that is not applicable if this form is used. [ ] PLEASE CHECK HERE IF ANY INFORMATION ON THIS FORM IS NEW OR REVISED AND INDICATE WHICH INFORMATION IS NEW OR REVISED. (1) The full name of every party that the attorney represents in the case (if the party is a corporation, you must provide the corporate disclosure information required by Fed. R. App. P 26.1 by completing item #3): CPC Acquisition, Inc ; Helms v. CPC Acquisition, Inc.; CPC Acquisition, Inc. v. Helms (2) The names of all law firms whose partners or associates have appeared for the party in the case (including proceedings in the district court or before an administrative agency) or are expected to appear for the party in this court: Law Office of Ralph J. Schindler, Jr., 53 West Jackson Boulevard, Suite 818, Chicago, IL (3) If the party or amicus is a corporation: i) Identify all its parent corporations, if any; and n/a ii) list any publicly held company that owns 10% or more of the party s or amicus stock: n/a Attorney's Signature: Attorney's Printed Name: Ralph J. Schindler, Jr. Date: June 20, 2008 Please indicate if you are Counsel of Record for the above listed parties pursuant to Circuit Rule 3(d). Yes No Address: 53 West Jackson Boulevard, Suite 818 Chicago, IL Phone Number: Address: (312) (312) Fax Number: ralphjschindler@sbcglobal.net rev. 01/08 AK

3 TABLE OF CONTENTS CIRCUIT RULE 26.1 DISCLOSURE STATEMENT i TABLE OF CONTENTS ii TABLE OF AUTHORITIES iv JURISDICTIONAL STATEMENT STATEMENT OF THE ISSUE PRESENTED FOR REVIEW STATEMENT OF THE CASE A. NATURE OF THE CASE B. DISPOSITION IN THE COURTS BELOW STATEMENT OF FACTS A. THE PARTIES B. THE FINANCING AGREEMENT C. THE FIRE D. THE ROTHSCHILD AND COM ED CLAIMS E. THIS ACTION SUMMARY OF ARGUMENTS ARGUMENT I: THE DISTRICT COURT CORRECTLY DETERMINED THE ROTHSCHILD SETTLEMENT WAS PROCEEDS OF LASALLE BANK S ORIGINAL COLLATERAL ARGUMENT II: CPCA HAS A PRIORITY INTEREST IN THE ENTIRETY OF THE COMED CLAIM BECAUSE IT IS PROCEEDS OF COLLATERAL COVERED UNDER LASALLE BANK S SECURITY AGREEMENT UNDER THE UCC ARGUMENT III: ALTERNATIVELY, LASALLE S INTEREST ATTACHED TO THE ROTHSCHILD SETTLEMENT AND COMED CLAIM THROUGH NOTICE OF THE CLAIM, AS PROVIDED IN THE SECURITY AGREEMENT AND FORMAL ii

4 AMENDMENT OF SCHEDULE B WAS NOT REQUIRED ARGUMENT IV: ALTERNATIVELY, LASALLE S SECURITY AGREEMENT WAS AMENDED TO INCLUDE THE ROTHSCHILD SETTLEMENT AND THE COMED CLAIM, THROUGH THE COMPOSITE DOCUMENT RULE, BY THE DOCUMENTS CERTIFIED SUBMITTED TO LASALLE CONCLUSION CERTIFICATE PURSUANT TO APPELLATE RULE 28.1(e)(2)(B) CIRCUIT RULE 30(d) STATEMENT CERTIFICATE PURSUANT TO CIRCUIT RULE 31(e)(1) VIRUS FREE VERIFICATION CERTIFICATE OF SERVICE ADDENDUM OF STATUTORY PROVISIONS ADD-1 TABLE OF CONTENTS FOR SUPPLEMENTAL APPENDIX ADD-5 iii

5 TABLE OF AUTHORITIES Cases Brooklyn Bagel Boys, Inc. v. Earthgrains Refrigerated Dough Prods., Inc., 212 F.3d 373 (7th Cir. 2000) C. O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill. 2d 27 (1981) Colonial Funding, LLC v. American Empire Surplus Lines Ins. Co., 308 Ill. App. 3d 376 (Ill. App. Ct. 1999) Falconbridge U.S., Inc. v. Bank One Il., N.A. (In re Vic Supply) 227 F.3d 928 (7th Cir. 2000)...28, 29, 30, 31 Fifteenth RMA Partners, L.P. v. Pac./West Communications Group, Inc. (In re Pac./West Communications Group, Inc.), 301 F.3d 1150 (9th Cir. 2002) Fonda v. General Cas. Co., 279 Ill. App. 3d 894 (Ill. App. Ct. 1992)... 22, 23 Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027 (11th Cir. 1997) In re Michelle s Hallmark, 219 B.R. 316 (Bankr. M.D. Fla. 1998)... 34, 36 In re Outboard Marine, 300 B.R. 308 (Bankr. N.D. Ill. 2004) In re Weiss, 376 B.R. 867 (Bankr. IL N.D. 2007) Rainier Nat l Bank v. Bachmann, 111 Wn.2d 298 (1988)... 19, 21, 22 Sears v. Conry, 321 Ill. App. 3d 997 (Ill. App. Ct. 2003) Stanziale v. Finova Capitol Corp. (In re Tower Air, Inc.), 397 F.3d 191 (3rd Cir. 2005) Stodd v. Reynard (In re Shooting Star Enters.), 76 B.R. 154 (B.A.P. 9th Cir. 1987)... 17, 18 UNI Imports, Inc v. Aparacor, Inc., 978 F.2d 984 (7th Cir. 1992) Wiersma v. O.H. Kruse Grain & Milling (In re Wiersma), 324 B.R. 92 (9th Cir. 2005)... passim iv

6 Statutes 28 U.S.C U.S.C U.S.C. 157(b)(2) U.S.C. 158(a)(1) U.S.C. 158(d) Ill. Comp. Stat. 5/ Ill. Comp. Stat. 5/9-102(a)(64)... 2, 5, 6, Ill. Comp. Stat. 5/9-102, Comment g Ill. Comp. Stat. 5/ Ill. Comp. Stat. 5/9-203(1) Rules Fed. R. Civ. App. P. 4(a)(3)... 1 The United States District Court for the Northern District of Illinois Internal Operating Procedure 15(a)... 1 v

7 JURISDICTIONAL STATEMENT The bankruptcy court had jurisdiction pursuant to 28 U.S.C and was referred by the District Court under Internal Operating Procedure 15(a). Determination of the validity, extent, or priority of a lien, is a core proceeding under 28 U.S.C. 157(b)(2). The District Court for the Northern District of Illinois had jurisdiction pursuant to 28 U.S.C. 158(a)(1), in that the Bankruptcy Court issued a final judgment in this case, which disposed of all parties claims in the adversary action, on January 11, 2007 and CPC Acquisition, Inc. filed notice of appeal to the District Court for the Northern District of Illinois on January 19, On December 12, 2007, the District Court for the Northern District of Illinois, Hon. Judge Lindberg, presiding, issued its final Memorandum and Order, affirming in part and reversing in part the Bankruptcy Court s Order. On January 15, 2008, CPC Acquisition, Inc. timely filed Notice of Cross-Appeal, in accordance with Fed. R. Civ. App. P. 4(a)(3). The United States Court of Appeals for the Seventh Circuit has jurisdiction over this Appeal pursuant to 28 U.S.C. 158(d), because this Appeal is from a final order of the District Court entered in an appeal taken of an order entered by the Bankruptcy Court. Moreover, the Court of Appeals has jurisdiction over this Appeal pursuant to 28 U.S.C which provides that [t]he courts of appeals... shall have jurisdiction of appeals from the final decisions of the district courts of the United States.... 1

8 The Trustee filed her Notice of Appeal on January 3, CPC Acquisition, Inc. accepts Trustee s Revised Jurisdictional Statement as complete and correct. STATEMENT OF THE ISSUES PRESENTED FOR REVIEW 1. Under the 810 Ill. Comp. Stat. 5/9-102(a)(64), definition of Proceeds, does a reviewing court err when it determines that a recovery under an insurance agent s errors and omissions policy for failure to properly cover the collateral included in the security agreement qualifies as proceeds and property of the Lender? 2. Where a fire in a Debtor s premises caused damage to collateral covered by a creditor s Security Agreement and the Debtor s business operations, and a subsequent lawsuit is filed to recover such damages, is the claim for the business interruption component of the loss considered rights or claims arising out of the collateral and thus Proceeds under 810 Ill. Comp. Stat. 5/9-102 (a)(64)? 3. Alternatively, under the U.C.C., is a bank s secured interest invalid where the Debtor grants a security interest in future commercial tort claims upon notice of the claim, written and oral notice is given of subsequently arising claims, and the creditor continues to finance based on those claims? 4. Alternatively, under the U.C.C. s Composite Document Rule, where a security agreement contemplates future documents to describe additional collateral, specifically commercial tort claims, should the trial court have 2

9 considered those subsequently generated documents as amendments further defining the collateral in the security agreement? STATEMENT OF THE CASE A. NATURE OF THE CASE This appeal presents a dispute over priority interests, under the Illinois Uniform Commercial Code ( UCC ) in two assets: (1) $88,000 in cash representing proceeds from the settlement of an errors and omission policy claim against the Rothschild Insurance Agency ( Rothschild Settlement or Rothschild Claim ) for damages to collateral securing a bank loan, and (2) a lawsuit currently pending in the Circuit Court of Cook County against Commonwealth Edison for damages to the collateral and business interruption arising out of a fire alleged to be caused by ComEd s negligence ( ComEd Claim ). CPC Acquisition, Inc. ( CPCA ) was the purchaser of substantially all of the assets of Certified Packaging Corporation ( Certified ) in a certain UCC sale conducted by LaSalle Bank, N.A. ( LaSalle ). As a successor in interest, CPCA stands in LaSalle s shoes. LaSalle had a perfected security interest in substantially all of the assets of Certified dating from March 29, In 2001, the Illinois legislature amended the UCC to allow, among other things, a security interest in a commercial tort claim. On August 28, 2001, LaSalle filed a U.C.C.-1 with the Illinois Secretary of State, claiming a security interest in all assets of the 3

10 debtor, including commercial tort claims. The Security Agreement between LaSalle and Certified was amended on May 20, 2002 to grant a security interest in all assets of the debtor, including Commercial Tort Claims listed on Schedule B of the Security Agreement. Though both Certified and LaSalle performed as if Certified granted LaSalle a secured interest in the Rothschild and ComEd claims, and LaSalle had documents in its position from Certified stating the same, LaSalle never amended Schedule B in its loan file to include the Rothschild Claim or the ComEd Claim. The Trustee s claim arises from a Judgment lien which attached to all assets of the debtor pursuant to a citation proceeding filed on November 18, It is undisputed that the Trustee s judgment lien attached to all assets of Certified to the extent the assets are not covered by LaSalle s prior perfected security interest, or the proceeds thereof. CPCA submits Proceeds, under the UCC, extends LaSalle s secured interest to both the Rothschild claim and the ComEd claim in their entirety. Alternatively, CPCA submits LaSalle s security agreement contemplated these claims and merely required Certified to provide LaSalle notice of the claims for LaSalle s interest to attach. Alternatively, CPCA submits the security agreement contemplated future documents to further describe collateral and those documents should have been considered as amendments to further define LaSalle s collateral. The Trustee acknowledges that LaSalle s security agreement was valid and that Certified informed LaSalle of both claims through 4

11 written and oral communications. The Trustee asserts, however, that LaSalle s failure to scribe those claims on to the 2002 Schedule B is fatal to LaSalle s interest. The Trustee asserts these claims are commercial tort claims, not proceeds and that the UCC requires a highly specific description of a commercial tort claim before attachment. B. DISPOSITION IN THE COURTS BELOW The Bankruptcy Court, after a bench trial, determined the Trustee had a valid Judgment lien on Certified s assets as of November 18, It held CPCA, through its UCC purchase from LaSalle, had a priority lien over all collateral covered under the Security Agreement between LaSalle and Certified. (SA1 at 9-10, 15) 1. It concluded, however, that the Rothschild Settlement was not proceeds of LaSalle s security interest in that it was not a claim arising out of damage to collateral within the meaning of 810 ILL. COMP. STAT. 5/9-102 (a)(64). (SA1 at 14). Instead, the Bankruptcy Court determined the Rothschild Settlement and ComEd claim were commercial tort claims under the UCC. (SA1 at 15-16). The Bankruptcy Court further held that the claims were not covered by LaSalle s Security Agreement, as such claims were not listed on Schedule B. The Bankruptcy Court accepted the Trustee s position that commercial tort claims have a stringent 1 See Short Appendix 1 ( SA1 ) attached to Appellant s Brief. SA1 is the Findings of Fact, Conclusions of Law, Final Order and Judgment from the Bankruptcy Court, dated January 1,

12 description requirement. Finally, the Bankruptcy Court determined the composite document rule could not be used to amend the Security Agreement because there was a security agreement in effect. (SA1 at 16-21). On Appeal, Senior District Court Judge Lindberg reversed the Bankruptcy Court, ruling LaSalle held a secured interest in the Rothschild Claim. The District Court, at page 5 of its opinion, noted the Bankruptcy Court failed to recognize that the Rothschild Settlement merely compensated for the amount that would have been paid out if it had been properly written. Judge Lindberg recognized that without the fire and the resulting damage to the collateral, there never would have been a Rothschild action or settlement; thus, the Rothschild action arose out of the damage to the collateral. Id. Judge Lindberg concluded, [t]he Rothschild settlement constitutes proceeds under 810 Ill. Comp. Stat. 5/9-102(a)(64) and CPCA has a security interest in those proceeds. Id. The District Court affirmed the Bankruptcy Court opinion that CPCA had an interest in the $2,000,000 claim only to the extent of damage to the collateral, which did not include business interruption loss, i.e., CPCA s interest included the machinery, equipment, fixtures, 6

13 and inventory damaged by the fire, but not the lost revenue, or profits during the business interruption. (SA2 at 6) 2. Both parties filed timely notices of appeal to this Court. STATEMENT OF FACTS The facts relevant to this appeal are not in dispute. CPC Acquisition, Inc. ( CPCA ) supplements Appellant s Statement of Facts as follows: A. THE PARTIES CPCA is an Illinois manufacturing company engaged in the plastic wrap and custom packaging business. Its principal place of business is in West Chicago, Illinois. On or about February 10, 2006, CPCA purchased substantially all of Certified s assets from LaSalle through a UCC sale. (SA1 at 10, 30, 31) Thus, CPCA stands in the place of LaSalle as to the assets at issue. The Debtors, former customers of Certified, are related companies that filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (Title 11, U.S.C.) in the United States Bankruptcy Court for the Northern District of Illinois on May 1, 2003, and were later converted to Chapter 7. (SA1 at 1). Brenda P. Helms, who was appointed as the Trustee of the Debtors bankruptcy estate, obtained a default judgment against Certified. (SA1 at 1-2). 2 See Short Appendix 2 ( SA2 ) attached to Appellant s Brief. SA2 is the Memorandum and Order of the District Court, dated December 12,

14 B. THE FINANCING AGREEMENT On or about March 29, 2000, Certified entered into a Loan and Security Agreement with CIT Group/Business Credit, Inc. ( CIT ). (SA1 at 5). On March 27, 2000 and June 5, 2000, CIT filed U.C.C.-1 financing statements related to the Security Agreement., (SA1 at 5, 11). On or about June 11, 2001, CIT assigned its interest as Certified s lender to LaSalle. (SA1 at 5, 12). In 2001, the Illinois legislature amended the UCC to allow, among other things, a security interest in a commercial tort claim. On August 28, 2001, LaSalle filed with the Illinois Secretary of States its UCC financing statements claiming a security interest in all assets of the debtor, including commercial tort claims as collateral. (SA1 at 6, 13) LaSalle filed, on January 31, 2005, a continuation statement of the CIT Financing Statement. (SA1 at 6, 13). On May 20, 2002, Certified and LaSalle executed the Second Amendment to Loan and Security Agreement, which was amended from time to time thereafter. (collectively the Security Agreement ). (SA1 at 6, 14). In the Security Agreement, Collateral included: All personal property of Borrower, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located, including without limitation: (a) all Accounts...and all Goods (b) all Chattel Paper, Instruments, Documents and General Intangibles...(c) all Inventory... (d) all Goods..., including without limitation, Equipment... (e) all Investment Property... (f) all Deposit Accounts... (g) all Letters of Credit Rights... (h) Commercial Tort Claims listed on Schedule B hereto; (i) any other property of Borrower now or hereafter in the possession, custody or control of Lender... and (j) all additions and accessions to, substitutions for, and 8

15 replacements, products and Proceeds of the foregoing property, including, without limitations, proceeds of all insurance policies insuring the foregoing property Borrower has no Commercial Tort Claims pending other than those set forth on Schedule B hereto as Schedule B may be amended from time to time. Borrower shall notify Lender promptly upon becoming aware of any commercial tort claim of borrower, which may arise, which notice shall constitute Borrower s authorization to amend Schedule B to add such Commercial Tort Claim. C. THE FIRE During the year 2000, Certified conducted business from two locations: 3800 Hawthorne Court, Waukegan, Illinois and 1950 Marquette Street, North Chicago, Illinois (the North Chicago Facility ). (SA1 at 6, 17) In December 2000, there was an electrical fire at the North Chicago Facility, due to a ComEd cable that fell on the building s metal roof. (SA1 at 6, 17) All equipment and machinery connected to any electric source was damaged by the fire (SA1 at 6, 17) Moreover, inventory, equipment, and merchandise at the facility incurred water damage from firefighting efforts. (SA1 at 6, 17) The North Chicago Facility was shut down for several months and never again became fully operational. SA1 at 6, 17) Prior to the fire, Certified submitted to LaSalle an appraisal report on the value of assets at the North Chicago Facility. (SA 1 at 7, 18) Ten months before the fire, the equipment and machinery at the North Chicago Facility was valued at $576,125. (SA1 at 7, 18). The loss to inventory and business 9

16 interruption was in excess of $1,000,000. (SA 1 at 7, 18). Certified also incurred costs to remove the remaining equipment. Certified submitted a claim for the fire damage to its insurance agent, Rothschild Insurance Agency, who submitted the claim to the carriers, Indiana Insurance and Hartford Boiler. (SA1 at 7, 19) Indiana denied coverage as Certified s insurance policy omitted the North Chicago location from the policy, though it was listed on the Certificate of Insurance provided to Certified and LaSalle. (SA1 at 7, 19) D. THE ROTHSCHILD AND COMED CLAIMS On February 8, 2002, Certified brought suit against Rothschild Insurance in the Circuit Court of Cook County, Chancery Division, Case No. 02 CH (SA1 at 7, 20) In the suit, Certified sought recovery for coverage under certain insurance policies and delay in payment. (SA1 at 8, 22). Certified and the insurance carriers settled their portion of the claim for $53,000 and the remaining count against Rothschild was transferred to the Law Division on September 23, (Stip. 16). On January 23, 2006, Certified ordered their attorney to accept a Settlement offer of $100,000 from Rothschild pursuant to John Littrill of LaSalle Bank. On or about December 16, 2005, Certified filed the ComEd claim in the Circuit Court of Cook County, Case No. 05 L (SA1 at 9, 26). In the ComEd Claim, Certified alleges ComEd was careless and negligent in its maintenance of a utility and power line, resulting in damage to property and 10

17 business interruption in the amount of $2,000,000. (SA1 at 9, 27). The case is currently pending. (SA2 at 9, 26). E. THIS ACTION On October 16, 2006, a trial was conducted before Judge Schmetterer in the Bankruptcy Court. (Tr. 1-3) 3. Mr. John Littrill, Vice-President of Commercial Loans for LaSalle Bank, was called to testify. (Tr ). He stated that the Bank had all assets with the corporation as collateral since the inception of the loan. (Tr. 32). Ahmit Shukla, Certified s former Controller, also testified that LaSalle had an interest in all assets, including the Rothschild and ComEd claims. (Tr ). Irwin Morris, Certified s former President, described the original collateral for the loan to include everything except our first born children. (Tr. 71). Mr. Morris testified that he was personally liable for the entire amount of the loan. (Tr. 44) LaSalle Bank s August 28, 2001 U.C.C.-1 public filing was admitted into evidence. (Tr. 25). It included commercial tort claims in its collateral description. (SA3) 4. The several security agreements were admitted into evidence. (Tr. 25). Responding to a subpoena served on LaSalle, Mr. John Littrill also produced in court certain exhibits which were discovered in LaSalle s loan file 3 The citation Tr. references the October 16, 2006 Transcript of Proceedings before the Hon. Schmetterer in the Bankruptcy Court, which is part of the record on appeal. 4 See Short Appendix 3 ( SA3 ) attached to this Brief. SA3 is the August 28, 2001 U.C.C.-1 filed by LaSalle with the Illinois Secretary of State. 11

18 relating to Certified. These documents, admitted into evidence as business records, showed LaSalle was given notice of the claim and that LaSalle treated the claims as part of its collateral base for continued funding. Those documents can be summarized as follows: a) Audited financial statements given to LaSalle by Certified wherein it is noted that There was a disruption of operations in the North Chicago facility... The adverse impact on operations was significant... Management has attempted to reach an equitable settlement with the relevant parties before filing lawsuits. (Bankruptcy Trial Exhibit P-6, p. 10) 5 ; b) a fax sent by Certified to LaSalle on October 28, 2003 which outlines the settlement of the coverage issues with Indiana Insurance Company for Counts I-IV of the Complaint and notes that Court V s claim against the Rothschild Agency continued (Bankruptcy Trial Exhibit P- 11); c) an internal LaSalle document which responds to concerns listed by a LaSalle field examiner. This response states Certified has filed a lawsuit against its insurance agent for not including the North Chicago building under its insurance policy. (Bankruptcy Trial Exhibit P-13); d) a copy of Certified s Board Resolutions of June 27, 2005, which reiterates that LaSalle has a first priority secured interest in all of the corporation s assets (Bankruptcy Trial Exhibit Group F); e) a copy of a fax transmission from Certified to its attorney authorizing the settlement of the Rothschild claim as instructed by John Littrill of LaSalle Bank. (SA4); 5 The citation Bankruptcy Trial Exhibits references the exhibits introduced during the October 16, 2006 Transcript of Proceedings before the Hon. Schmetterer in the Bankruptcy Court, which is part of the record on appeal. 12

19 f) copies of insurance certificates for Certified written by Rothschild for Indiana Insurance and Hartford Steam Boiler, listing LaSalle Bank as loss payee for all assets of Certified and including LaSalle s required coverage for business interruption loss. (Bankruptcy Trial Exhibits P- 3-5, 7-10). In addition to the above referenced documents, certain testimony was received that described Certified s communications to LaSalle regarding the fire, the original claims against Indiana Insurance, the claim against Rothschild, and the claim against ComEd. Irwin Morris, former President of Certified, testified, we gave her [Debbie Warner, LaSalle Bank s loan officer] notice of the loss and claim immediately upon its occurrence. (Tr. 69). Redirect examination of Mr. Morris finished with the following sequence, found on page of the transcript: Q [Mr. Schindler]: Do you know what the hundred thousand dollars - - how that dollar amount was established?... A [Mr. Morris]: The hundred thousand dollars [the Rothschild Settlement] settled equipment that was ruined during the fire that was pledged as collateral to LaSalle Bank. Q: Thank you. Q: You were asked if you ever filed any amendment to Schedule B? A: Yes. Q: Is it your function to amend Schedule B? A: No, it is not. Q: But you gave notice of the claim to LaSalle; is that correct? A: Yes, we did. Ahmit Shukla, Certified s former Controller, testified that it was his function to provide LaSalle with loan collateral schedules on a monthly basis to 13

20 maintain conformity with the loan balance and finance charges. (Tr. 97). Mr. Shukla testified that he provided LaSalle with notice of the fire and the claims that arose from the fire at all stages. (Tr. 98). Like Littrill, Shukla agreed the interest rate Certified paid and the amount LaSalle was willing to continue to loan Certified was based upon a collateral schedule that included the insurance claims. Specifically, Shukla testified, at pages of the transcript, that he advised LaSalle of both claims : A: [The Witness]: Because that s us not being in the not having the right situation financially. We were in trouble, so we saved -- you know, this claim will come in and everything will be fine. THE COURT: Tell me again who -- what position she held and where. A: She was the loan officer. THE COURT: LaSalle? A: At LaSalle. THE COURT: Thank you. Q: [Mr. Schindler]: And so is it your testimony that you were advising her that she had this other asset apart from the collateral schedules? A: Yes. Q: And did you tell her what the value was of this other collateral? A: I don t remember the exact numbers, but, yes. Q: Did you estimate for her benefit what the claim was? A: Approximately 500,000. Q: So you were telling Debbie Warner that I got this $500,000 claim; is that correct? A: Yes. Q: And the claim was relating to the insurance claim? A: Yes. Q: Okay. Was that the Rothschild case or the Commonwealth Edison case or both? 14

21 A: Both SUMMARY OF ARGUMENTS The District Court properly determined the Rothschild Settlement constituted proceeds of LaSalle Bank s original collateral which was damaged in the fire and awarded that amount to CPCA. The District Court recognized that proceeds has been generally interpreted broadly in order to compensate the lender. The Bankruptcy Court, and the Trustee, advanced a highly restrictive definition of proceeds and generated expansive new requirements, never before recognized in the law, before a creditor could attach a secured interest in commercial tort claims. Whether the District Court properly determined the settlement was proceeds of LaSalle s collateral, whether notice to LaSalle of the commercial tort claim was sufficient for LaSalle s interest to attach, or whether the composite document rule applied in this case to amend the financing agreement, the District Court properly recognized LaSalle Bank s prior priority position. As such, the District Court s judgment on the Rothschild settlement should be affirmed. The District Court s opinion erred only in so much as it denied CPCA recovery for the business interruption loss claimed as part of the ComEd claim. CPCA submits the business interruption loss, like the remainder of the ComEd claim and the entirety of the Rothschild Settlement are proceeds of LaSalle s collateral. Alternatively, the court below should have determined LaSalle s interest attached to the business interruption loss because Certified 15

22 provided notice of the claim and that was all that was required for LaSalle s legal rights to attach. Finally, even if this Court determines business interruption loss is not proceeds of the original collateral and that LaSalle s notice of future commercial tort claims clause is unenforceable, this Court should determine the documents sent by Certified to LaSalle were incorporated into the security agreement, sufficiently described the claims, and therefore LaSalle s interest attached under the composite document rule. As such, CPCA requests this Court reverse the District Court s decision granting the Trustee any portion of the ComEd claim. ARGUMENT I THE DISTRICT COURT CORRECTLY DETERMINED THE ROTHSCHILD SETTLEMENT WAS PROCEEDS OF LASALLE BANK S ORIGINAL COLLATERAL The District Court correctly determined the Rothschild Settlement was proceeds of LaSalle Bank s original collateral, rejecting the Trustee s restrictive interpretation of that term. More importantly, the facts of this case do not require a broad reading of proceeds: the Rothschild Settlement is money Certified received to replace some of the damage to its assets, the entirety of which was collateralized to LaSalle. As such, the District Court correctly determined the Rothschild Settlement was CPCA s property and its opinion should be affirmed. Section 5/9 102(a)(64) of Chapter 810 of the Illinois Complied Statutes (810 Ill. Comp. Stat. 5/9 102(a)(64)) provides that: Proceeds, except as used in Section 9-609(b), means the following property: 16

23 (A) whatever is acquired upon the sale lease, license, exchange, or other disposition of collateral; (B) whatever is collected on, or distributed on account of, collateral; (C) rights arising out of collateral; (D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or (E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. Courts have repeatedly interpreted proceeds broadly and the Revised Article 9 includes no indication these precedents should be altered. As stated recently, the legislature defined proceeds so broadly that there is very little difference between the right to proceeds and the right to the full business interest. In re Weiss, 376 B.R. 867, 878 (Bankr. IL N.D. 2007)(italics added). As the Ninth Circuit Court of Appeals, in Wiersma v. O.H. Kruse Grain & Milling (In re Wiersma), 324 B.R. 92, 108 (9th Cir. 2005), reversed in part on other grounds, 483 F.3d 933 (9th Cir. 2007), recently noted: [the] legislative intent was to give proceeds the broadest possible definition. The nature of Bank's transaction with Debtors was extensive and related to the complete dairy operation. Proceeds under such a scenario must apply in a broad sense in order to compensate the secured creditor. See also Stanziale v. Finova Capitol Corp. (In re Tower Air, Inc.), 397 F.3d 191, (3rd Cir. 2005)(noting the historical broad interpretation of proceeds under the UCC); Ford Motor Credit Co. v. Stevens (In re Stevens), 130 F.3d 1027 (11th Cir. 1997)(accord); Stodd v. Reynard (In re Shooting Star Enters.), 76 B.R. 17

24 154, 156 (B.A.P. 9th Cir. 1987)( it is well recognized that the term proceeds is to be given a broad and flexible interpretation ). There is no indication the Revised Article 9 set out to alter these precedents that creditors, like LaSalle, have relied on. In fact, the Committee Comments to the Revised Article 9 specifically provide, a security interest in a commercial tort claim also may exist under this article if the claim is proceeds of other collateral. 810 Ill. Comp. Stat. 5/9-102, Comment g. Accordingly, the Trustees restrictive interpretation of proceeds must fail. The District Court s position is further supported by the facts of this case. Certified was a small business with every asset pledged as security including a personal guarantee from its owner, Irwin Morris. LaSalle further required insurance on all the collateral including business interruption insurance to maintain its position over Certified as a going concern in the event of a catastrophic event that stopped the generation of revenue required to collateralize LaSalle s loan. Two catastrophic events actually occurred - the December 2000 fire and the failure to properly draft the insurance policy. Certified constantly informed LaSalle of the progress of insurance settlements and LaSalle continued to fund the loan and charge interest as if the insurance settlements were its collateral. Unfortunately, the fire, the bankruptcy of its largest customer, Sarah Michaels, and the failure to properly draft the policy caused the end of Certified. CPCA submits it does not require a broad or flexible interpretation of proceeds to determine that LaSalle s interest 18

25 extended to the Rothschild Settlement under these facts. The District Court s position should be affirmed in that regard. ARGUMENT II CPCA HAS A PRIORITY INTEREST IN THE ENTIRETY OF THE COMED CLAIM BECAUSE IT IS PROCEEDS OF COLLATERAL COVERED UNDER LASALLE BANK S SECURITY AGREEMENT UNDER THE UCC CPCA respectfully submits LaSalle s interest in the entirety of the ComEd claim is proceeds of LaSalle s collateral and the Bankruptcy and District Court erred in excluding any portion of any recovery from that claim, specifically the Business Interruption Loss. CPCA submits the correct reasoning is that of the Ninth Circuit Court of Appeals in In re Wiersma and the majority of the Washington Supreme Court in Rainier Nat l Bank v. Bachmann, 111 Wn.2d 298 (1988). Both of the courts have already addressed this issue and concluded lost revenue and profits (i.e. the business interruption loss) are included as proceeds when revenue generating collateral is damaged or otherwise disposed of. As such, CPCA requests this Court reverse the lower court and deny the Trustee any recovery from the ComEd claim. The instant case is analogous to the Ninth Circuit case interpreting the Revised Article 9 s definition of proceeds in light of commercial tort claims, Wiersma v. O.H. Kruse Grain & Milling (In re Wiersma), 324 B.R. 92, 106 (9th Cir. 2005). In Wiersma, two ranchers, Mr. and Mrs. Wiersma, filed bankruptcy after they lost their herd of cows to electric shocks caused by the negligence of Geitzen, an electric fence installer. Id. at 99. The damaged cows stood as 19

26 collateral for a loan to Bank West. The Wiersmas brought a negligence claim against Geitzen for $6 million, which was proposed to be settled for $2.5 million. Id. at 100. Bank West claimed a senior security interest in the entirety of the proposed settlement as proceeds of the original damaged collateral covered under the security agreement, namely the herd. Id. at 100. A livestock feed distributor, Ferndale, likewise claimed a security interest in the proposed settlement, evidenced by a security agreement in the commercial tort claim for funds he had advanced specifically attaching any and all proceeds of the Geitzen lawsuit. Id. at 99. On appeal, the Ninth Circuit noted the painstaking review that occurred at the bankruptcy court level to determine if the underlying action was a commercial tort claim or a breach of contract action. Id. at 106. The court held that this time was spent in vain, ultimately rejecting Ferndale s argument that the Settlement Proceeds emanated from the insurance coverage of Geitzen s wrongful acts, not damage to the cows. Id. at 107. The Ninth Circuit ruled the damaged cows were covered by Bank West s Security Agreement, because the commercial tort claims were more properly characterized, under the UCC, as proceeds of the bank s covered collateral, stating: It is clear that rights arising from loss or damage to collateral are "proceeds whether or not insurance covers the loss: (D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; 20

27 Moreover, in this case the insurance provides only the source of the settlement funds, and, in itself, is not replacement collateral. The Ninth Circuit has held that legislative intent was to give proceeds the broadest possible definition. The nature of Bank's transaction with Debtors was extensive and related to the complete dairy operation. Proceeds under such a scenario must apply in a broad sense in order to compensate the secured creditor. Id. at 108 (emphasis added, internal citations omitted). The Wiersma court noted the Ninth Circuit s lengthy discussion of the effect of commercial tort claims and proceeds under the former Article 9 in Fifteenth RMA Partners, L.P. v. Pac./West Communications Group, Inc. (In re Pac./West Communications Group, Inc.), 301 F.3d 1150, (9th Cir. 2002). The Wiersma court relied, in part, on a Washington Supreme Court case, Rainier Nat l Bank v. Bachmann, 111 Wn.2d 298 (1988), interpreting proceeds under Washington s former Article 9. In Rainier, the creditor attached all assets of a dairy farm, including the existing herd, all after acquired cows, all equipment and machinery used in connection with the herd, all rights to sales generated by the farm, and all proceeds therefrom." Rainier, 111 Wn.2d at The debtor elected to participate in the Dairy Termination Program (DTP), whereby the federal government paid dairy farmers to sell their cattle for slaughter or for export and paid the farmer for lost milk sales. Id. The dairy farmers argued that the bank s security interest comprised only the amount received at auction for slaughter and not the amount received from the DTP program, as it was not a sale of either the cows or the dairy products. Id. The court rejected this argument and held: 21

28 It appears plain that the statutory definition of "proceeds", which is binding upon the parties to the agreement, is so allencompassing that the DTP payments are included. 'Proceeds' includes whatever is received upon the sale... or other disposition of collateral". It is apparent that disposition under the DTP is within the phrase "or other disposition." The parties did not contract for security in the proceeds only upon a sale with the resulting sale price being applied to the debt. Had that been their intention, the agreement would have been limited to proceeds received upon sale. The phrase "or other disposition" necessarily anticipates the herd being disposed of in some manner other than by sale. The statute also evidences an intent to include more than the usual cash proceeds received in a normal sale of the collateral. It provides that proceeds include "whatever" is received. The dictionary definition of "whatever" confirms the common understanding of the meaning of the word "whatever": "anything... everything... no matter what... anything at all". Webster's Third New International Dictionary 2600 (1976). The debtors will receive from DTP more than the equivalent of cash value of the dairy herd but that is not determinative. The sale of the herd for slaughter is a disposition within the statute. The contract payments are within the common meaning and understanding of the word "whatever" is received upon disposition. Id. at (emphasis in original, internal citations omitted). While the issue was not directly addressed in the context of a UCC case, this issue has been addressed by courts in Illinois, which agree with the Ninth Circuit s broad reading of proceeds under the former Article 9. See C. O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill. 2d 27, 33 (1981); Colonial Funding, LLC v. American Empire Surplus Lines Ins. Co., 308 Ill. App. 3d 376, 379 (Ill. App. Ct. 1999); Fonda v. General Cas. Co., 279 Ill. App. 3d 894,

29 (Ill. App. Ct. 1992) (all interpreting proceeds broadly for purposes of determining the right to unfettered control over the payment of insurance money). An examination of the facts surrounding this case is illustrative of why a blanket lien on all assets especially when the nature of the assets are to generate revenue should include recovery from a lawsuit for interruption of those revenues. Assume, for example, that LaSalle s loan to Certified was $2,000,000, that Certified generated sales of approximately $500,000 per month, and that LaSalle s loan was collateralized with approximately $1,500,000 of Accounts Receivable, $1,000,000 of equipment and inventory. Assume also that Certified before and after the fire maintained a collection rate from its Accounts Receivable of approximately $500,000 per month. As each month passes without production and the generation of new accounts receivable, LaSalle s secured position becomes less secure. Without a claim to the business interruption component of the loss, LaSalle faces a difficult decision. If this Court were to accept the Trustee s position, immediately following the fire, LaSalle would have been forced to insist that the Accounts Receivable be used to repay the loan and not to regain operations. Here LaSalle worked with Certified to fund the continuing operations and extend Certified s business life. As a result of LaSalle s willingness to continue to lend to Certified and wait for the settlement of the claims, a subsequent third party Judgment Creditor, 23

30 the Trustee was allowed to obtain a priority position over the Bank s lien, solely because of the negligent actions of two independent third parties. It is submitted that the District Court s opinion disallowing LaSalle s security interest in the business interruption component of Certified s damages sets a bad precedent. Here LaSalle could have insisted that collections of Accounts Receivable be used to reduce its loan. LaSalle did not. LaSalle allowed Certified to expend such funds to move and repair equipment, rebuild from the fire, while depleting LaSalle s security interest. A lender should be rewarded for such action not penalized by allowing an intervening creditor to prevail. Further, CPCA questions when this Court would have LaSalle amend its Security Agreement? LaSalle was the loss payee on the Business Interruption Policy that was subsequently found not to exist or to have no efficacy. Should it have amended it when the fire occurred, or when it found out that the Business Interruption Policy was not valid after the loss in Chancery Court for the Declaratory Judgment? What about the rights of creditors which may have arisen during the interim should they have priority over LaSalle? The position advanced by the Trustee and accepted by the courts below places new unknown hurdles in the way of a secured creditor. Finally, the facts of this case also support a broad and flexible interpretation of proceeds to make LaSalle whole. The measure of damages that must be proven in the ComEd Claim will be the damage to the inventory, 24

31 machinery and equipment and the loss of operating income during the shutdown period. LaSalle specifically required Certified to carry business interruption coverage to make LaSalle whole in the event of a loss. CPCA submits the business interruption insurance was meant to cover the draw down of the Accounts Receivable component of the collateral since the value of these assets will continually degrade in the event of a fire until Certified s plant became operational again. LaSalle s decision to accept its position in the insurance recovery and the lawsuits and give Certified a chance to recover from these catastrophes should not be used as a means to deny its secured interest. CPCA submits this approach is more in accord with the historical broad and flexible approach to proceeds and more in accord with the purpose and effect of these revisions [in Article 9 which] are to enhance certainty so that lenders will be willing to provide more credit. Wiersma, 324 B.R. at 107. Again, the effect of the court s ruling is to allow an intervening creditor to recover from the loss of LaSalle s collateral, because of the negligent actions of third parties. CPCA submits such is not the proper interpretation of proceeds and the decision of the court below allowing the Trustee any interest in the claims should be reversed. ARGUMENT III ALTERNATIVELY, LASALLE S INTEREST ATTACHED TO THE ROTHSCHILD SETTLEMENT AND COMED CLAIM THROUGH NOTICE OF THE CLAIM, AS PROVIDED IN THE SECURITY AGREEMENT AND FORMAL AMENDMENT OF SCHEDULE B WAS NOT REQUIRED Even if this Court finds the District Court erred when it determined the Rothschild Settlement is proceeds under the UCC, this Court should affirm 25

32 CPCA s rights in that $88,000. The financing agreement between LaSalle and Certified required Certified to provide notice of any new commercial tort claims to trigger LaSalle s legal rights in the claims. Such notice constituted LaSalle s right to amend Schedule B. The District Court ruled since LaSalle did not actually amend Schedule B, the Security Agreement did not attach. Yet, the evidence and testimony at trial showed without contradiction that Certified repeatedly informed LaSalle, orally and in writing, of the commercial tort claims. Uncontradicted testimony and evidence further showed both LaSalle and Certified the only parties to the financing agreement considered the Rothschild claim as LaSalle s collateral, before and after the Trustee s 2005 citation notice. As such, the District Court s decision on the Rothschild Settlement should be affirmed. Further, for this reason, the District Court s decision granting the Trustee any interest in the ComEd claim should be reversed. It is axiomatic that LaSalle had a security interest in both the Rothschild Settlement and the ComEd claim as soon as Certified signed a security agreement which contains a description of the collateral, value has been given, and the debtor has rights in the collateral. Sears v. Conry, 321 Ill. App. 3d 997, 999 (Ill. App. Ct. 2003)(Citing 810 Ill. Comp. Stat. 5/9-203(1)); UNI Imports, Inc v. Aparacor, Inc., 978 F.2d 984 (7th Cir. 1992). The financing agreement in the case at bar defines LaSalle s rights to collateral in several places, most notably in Section 6, which provides: 26

33 All personal property of Borrower, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located, including without limitation: (a) all Accounts...and all Goods (b) all Chattel Paper, Instruments, Documents and General Intangibles...(c) all Inventory... (d) all Goods..., including without limitation, Equipment... (e) all Investment Property... (f) all Deposit Accounts... (g) all Letters of Credit Rights... (h) Commercial Tort Claims listed on Schedule B hereto; (i) any other property of Borrower now or hereafter in the possession, custody or control of Lender... and (j) all additions and accessions to, substitutions for, and replacements, products and Proceeds of the foregoing property, including, without limitations, proceeds of all insurance policies insuring the foregoing property Borrower has no Commercial Tort Claims pending other than those set forth on Schedule B hereto as Schedule B may be amended from time to time. Borrower shall notify Lender promptly upon becoming aware of any commercial tort claim of borrower, which may arise, which notice shall constitute Borrower s authorization to amend Schedule B to add such Commercial Tort Claim. (emphasis added). This description highlights two critical points about LaSalle s collateral under this financing agreement: 1) LaSalle s rights were incredibly broad, encompassing the entirety of Certified s business, and 2) in order for LaSalle to obtain a secured interest in any new commercial tort claims, Certified merely had to provide LaSalle with notice of the claim, which notice shall constitute Borrower s authorization to amend Schedule B. The Trustee does not dispute the fact that Certified continuously provided LaSalle with notice of the fire, the problems with the insurance coverage, and the status of the claims against Rothschild and ComEd. Given the evidence and the testimony adduced at trial, any such dispute would be 27

34 frivolous. Further, the Trustee offers no argument to dispute the evidence and testimony adduced at trial which showed both LaSalle and Certified the only parties to the financing agreement believed the Rothschild Settlement and the ComEd claim were LaSalle s collateral, before and after the Trustee s lien. Instead, the Trustee argues here, and the court ruled below, that LaSalle s interest never attached to the Commercial Tort Claim because Schedule B was never amended by LaSalle to physically write the name of the lawsuit on such Schedule, and that such failure was dispositive of the issue. CPCA submits such an argument flips the legal issue on its head: LaSalle, attempting to enforce its security agreement against Certified would merely need to show Certified s acquiescence, in writing, to LaSalle s attachment; LaSalle need not show it also accepted the collateral by transferring Certified s acquiescence from one document in LaSalle s position to another document also in LaSalle s possession. Notice to the world had been given in LaSalle s UCC-1 filing which listed commercial tort claims amongst the collateral in which LaSalle had a secured interest. The formalistic requirement that LaSalle amend a schedule to be held in its own loan file exalts form over substance to its highest degree. The fact pattern sub judice is analogous to this Court s decision in Falconbridge U.S., Inc. v. Bank One Il., N.A. (In re Vic Supply) 227 F.3d 928 (7th Cir. 2000). In Falconbridge, Vic Supply, the debtor, obtained financing from Bank One, and signed a security agreement covering all assets. Id. at

35 Like LaSalle in the instant matter, Bank One continued financing for several years and amended the security agreement from time to time. Id. Later, Falconbridge obtained a security interest in the nickel that Vic Supply sold. Id. When Vic Supply filed bankruptcy, Falconbridge and Bank One disputed superiority. Id. Falconbridge, like the Trustee in the case at bar, argued Bank One s security agreement could not extend to the collateral in question because Bank One never placed its signature on the security agreement. Id. at 930. Here, the Trustee argues LaSalle s agreement is defective because Schedule B is blank and never amended. In Falconbridge, the subsequent creditor argued the agreement was defective because Bank One s agreement: provides that the terms and provisions of this provision shall not become effective and Bank shall have no duties hereunder unless and until this agreement is accepted by Bank as provided below and below is a blank for a signature that was never filled in. According to its terms, Falconbridge argue[d], the agreement never came into effect. Although the agreement authorizes the bank to fill in any blanks in it, the bank had not done that; and according to Falconbridge, it was too late for the bank to do so once Falconbridge perfected its own security interest by filing a UCC financing statement. In short, Falconbridge argues, the bank had no security interest before Falconbridge acquired its own security interest. Id. at 933. This Court s panel unanimously agreed that Falconbridge did not have standing to claim invalidity of the Bank One-Vic Supply financing agreement. Id. at ; see also id. at 933 (concurring opinion by Williams, J., noting 29

36 disagreement with Posner and Wood, J., J., on whether Bank One s absence of a signature was a fatal flaw). For completeness, however, Judge Posner, writing for himself and Judge Wood, added: the security agreement was valid; that is, Vic would have had no defense against enforcement of the agreement by the bank, or vice versa. For one thing, it is apparent from the wording of the signature requirement and the fact that the bank was authorized to fill in any blank in the agreement that the requirement was intended solely for the bank's protection, and was not intended to confer any right on Vic; it was a defect of which no one could complain. For another thing (but it is actually closely related), after the agreement was not signed the bank lent money to Vic against its inventory nonetheless, and the parties assumed that this credit was pursuant to the terms of the security agreement. Acceptance can be effectuated by performance as well as by a signature. Restatement (Second) of Contracts 30(2) (1981); 1 Farnsworth, supra, 3.12, p. 222; see also UCC 2-206(1)(a); 1 White & Summers, supra, 1-5, p. 55. And while parties can specify that performance shall not be effective as acceptance, Golden Dipt Co. v. Systems Engineering & Mfg. Co., 465 F.2d 215 (7th Cir. 1972); In re Newport Plaza Associates, L.P., 985 F.2d 640, 645 (1st Cir. 1993); Restatement, supra, 30, comment a, this would be an implausible interpretation of the acceptance clause that we quoted earlier. It would amount to saying that if the parties had been asked, "if the bank fails to sign the agreement, will the agreement be void even if the parties behave in a way that shows they thought it was in effect?" they would have said "yes." Or that if they had been asked, "does the bank's failure to sign mean that the debtor could repudiate the agreement at any time?" they would have said "no." What they really would have said would have been, "don't be silly; it was just an oversight, of no significance-- and anyway the requirement of the bank's signature was for the protection of the bank, not of the debtor." Id. at

37 The Falconbridge court further noted, the fact that section requires the debtor to sign and does not mention signature by the creditor helps to show that the draftsmen did not think that a priority should be lost merely because the creditor's signature was missing. Id. at 931. While Falconbridge involved the absence of a signature and the instant matter involves LaSalle s failure to transfer Certified s authorization from one document to another, it is a distinction without a difference. Like Bank One, LaSalle had the right to amend Schedule B any time after notice. Like Bank One, LaSalle continued to loan money to Certified. Uncontradicted testimony by both Certified and LaSalle indicated LaSalle factored the value of the lawsuits into its determination of how much to continue to lend Certified and at what rate of interest. After the Trustee s lien, Certified s president, Irwin Morris, directed Certified s attorney to accept the Rothschild Settlement offer of $100,000 as instructed by John Littrill of LaSalle Bank. (Bankruptcy Trial Exhibit P-17). Clearly, before, during, and after the Trustee s lien, both Certified and LaSalle manifested their mutual intent to use the Rothschild and ComEd claims as collateral. If anyone had asked the parties before the Trustee s citation lien whether Certified could refute LaSalle s interest in the claims because LaSalle failed to transfer Certified s authorization from one document to another (as they were asked in the Bankruptcy Court), they would have likely responded as Judge Posner foreshadowed, don't be silly; it was just an oversight, of no significance. 31

38 In short, Certified signed an agreement which authorized LaSalle to use the Rothschild claim and the ComEd action as collateral, upon notice given to LaSalle of any such claim. That Certified actually gave notice of the claims is not in dispute. That LaSalle continued lending money using the value of those claims as collateral is also not in dispute. The District Court s decision granting CPCA the Rothschild Settlement should be affirmed and its decision granting any portion of the ComEd claim to the Trustee should be reversed. ARGUMENT IV ALTERNATIVELY, LASALLE S SECURITY AGREEMENT WAS AMENDED TO INCLUDE THE ROTHSCHILD SETTLEMENT AND THE COMED CLAIM, THROUGH THE COMPOSITE DOCUMENT RULE, BY THE DOCUMENTS CERTIFIED SUBMITTED TO LASALLE Alternatively, the District Court s decision that CPCA has a priority interest in the Rothschild Settlement should be affirmed and its decision granting the Trustee any portion of the ComEd claim should be reversed because LaSalle s Security Agreement was amended to include those claims as allowed by the Composite Document Rule ( CDR ). The courts below erred in not considering the CDR because LaSalle s security agreement specifically contemplates the existence of future documents to further describe collateral. Under these facts, CPCA submits the CDR is properly used to incorporate the documents found in LaSalle s loan file that adequately describe the claims and collectively indicated the party s intention to grant LaSalle a secured interest in such claims. The lower courts decisions limiting such interest should be reversed. 32

39 The District Court, like the Bankruptcy Court, ruled that the CDR is only allowed to create a security agreement when a collection of documents, taken as a whole, suggest that the parties intended to create a security agreement; not to amend an existing security agreement. (SA2, 10). While it is true the rule is not generally applicable where a security agreement exists, CPCA submits that where the Security Agreement contemplates the existence of a future document, the CDR should be used to incorporate those documents and to amend the existing agreement. Here, LaSalle s Security Agreement does anticipate such future documents to attach to as yet unknown commercial tort claims and those documents do come into existence and clearly describe the claims. In the instant matter, the very security agreement the lower courts used to reject the CDR anticipates the existence of future documents, which will then become effective to amend the agreement. LaSalle s Security Agreement provides, at 6.15: 6.15 Borrower has no Commercial Tort Claims pending other than those set forth on Schedule B hereto as Schedule B may be amended from time to time. Borrower shall notify Lender promptly upon becoming aware of any commercial tort claim of borrower, which may arise, which notice shall constitute Borrower s authorization to amend Schedule B to add such Commercial Tort Claim. (emphasis added). LaSalle and Certified agreed that, in the event of a newly realized commercial tort claim, Certified would provide LaSalle notice of the claim. This clause anticipates future communications and documents. Those documents, which 33

40 were introduced into evidence in the Bankruptcy Court, clearly describe the collateral, acknowledge the existence of LaSalle s interest, and are signed by Certified. CPCA submits the CDR would allow the incorporation of those documents into the security agreement, amending the latter to include the Rothschild Settlement and the ComEd claims. Such was the holding of the bankruptcy court in In re Michelle s Hallmark, 219 B.R. 316 (Bankr. M.D. Fla. 1998). In Michelle s, the debtor signed two security agreements, which purported to grant a security interest to collateral on the attached Schedule A. Id. at 317. Schedule A was missing on both security agreements. As here, the bankruptcy trustee argued the secured creditor held no valid security agreement and that the Trustee s interest should prevail. Id. The court responded: The document refers to a list of collateral on attached Exhibit A, which is in fact not attached. The omission of the description in the document entitled "Security Agreement" is not fatal, however. A security agreement may be embodied in multiple documents. In the Matter of The Kids Stop of America, Inc., 64 B.R. 397, 399 (Bankr. M.D. Fla. 1986). The Court may therefore consider each of the relevant loan documents to determine whether they cumulatively comprise an enforceable security agreement. Id. at 320. In the instant matter, the Bankruptcy Court acknowledged the ruling in Michelle s but determined it: is not stare decisis binding judges of this District... and is distinguishable because (1) it did not involve commercial tort claims that must be described with specificity; (2) the exhibits and schedules that were supposed to list the assets were missing, not blank; and (3) the court only relied on documents that were referenced in the security agreement or 34

41 executed contemporaneously with the security agreement. SA1, 21. CPCA submits the court s first reason is directly contradicted by the UCC because the Revised Article 9 has no such hyper-specific description requirement to attach commercial tort claims. The Official Comments, as if predicting the Bankruptcy Court s error, rebuked the notion of a hyper-specific description of the claim, stating, at 810 Ill. Comp. Stat. 5/9-108: 5. Consumer Investment Property; Commercial Tort Claims. Subsection (e) requires greater specificity of description in order to prevent debtors from inadvertently encumbering certain property. Subsection (e) requires that a description by defined "type" of collateral alone of a commercial tort claim... is not sufficient... The reference to "only by type" in subsection (e) means that a description is sufficient if it satisfies subsection (a) and contains a descriptive component beyond the "type" alone... Subsection (e) does not require a description to be specific. For example, a description such as "all tort claims arising out of the explosion of debtor's factory" would suffice, even if the exact amount of the claim, the theory on which it may be based, and the identity of the tortfeasor(s) are not described. (Indeed, those facts may not be known at the time). (emphasis added). Clearly this example shows the Bankruptcy Court s judgment, requiring a hyper-specific description to attach a commercial tort claim is unsupportable. The Bankruptcy Court s second reason, that the schedules were missing and not blank, should likewise be legally irrelevant the simple fact is the referenced schedules listed no assets in both cases. Finally, the Bankruptcy Court s third reason misstates the facts of LaSalle s Security Agreement 35

42 because that agreement did, as noted, contemplate the very documents produced from LaSalle Bank s loan file evidencing the grant of a secured position on the claims at issue. The Bankruptcy Court, apparently, determined LaSalle s documents came into existence before the security agreement and applied the parol evidence rule instead of interpreting the terms of the agreement in accordance with those later documents, more properly classified as evidence of Certified and LaSalle s course of performance. See Brooklyn Bagel Boys, Inc. v. Earthgrains Refrigerated Dough Prods., Inc., 212 F.3d 373, 380 (7th Cir. 2000) (noting, like the common law, 810 Ill. Comp. Stat. 5/2-208 allows course of performance to interpret the terms of a contract under the U.C.C.). Finally, while it is true that In re Michelle s, and decisions from other jurisdictions are persuasive only, in the context of the UCC, that persuasive value should be heightened where it is self-evident that both the statute itself and the decisions from other U.C.C. jurisdictions provide the foundation for disposition of the question at issue. In re Outboard Marine, 300 B.R. 308 (Bankr. N.D. Ill. 2004). Here, the documents submitted were not only referenced in the Agreement (notice to be provided in 6.15), they clearly described the claims, and showed that Certified granted LaSalle an interest. In reliance on those documents and representations by Certified, LaSalle extended financing. As such, CPCA submits the District Court s opinion granting CPCA the Rothschild 36

43 Settlement should be affirmed and, to the extent that opinion allows the Trustee any interest in the ComEd claim, it should be reversed. CONCLUSION CPCA respectfully requests this Court affirm the decision of the District Court holding that the $88,000 of funds from the Rothschild Claim are proceeds from the destruction of LaSalle s collateral. Further, CPCA requests the Court affirm that part of the Bankruptcy and District Court s opinion that held that LaSalle s security interest attached to the ComEd Claim to the extent of damages to LaSalle s secured collateral but reverse that part of such opinions denying recovery as to the business interruption component of any such recovery. It is submitted that the Security Agreement, the intent of the parties and the Composite Documents admitted at trial indicate that there was an intent to grant a security interest in such business interruption and that LaSalle s lien did in fact attach to such interest. Respectfully Submitted, The Law Offices of Ralph J. Schindler, Jr. 53 West Jackson Boulevard, Suite 818 Chicago, Illinois (312) Ralph J. Schindler, Jr. Attorney for CPC Acquisitions, Inc. 37

44 CERTIFICATE PURSUANT TO APPELLATE RULE 28.1(e)(2)(B) I, Ralph J. Schindler, Jr., hereby certify that Plaintiff-Appellee/ Cross-Appellant s principal and responsive brief complies with the type volume limitation of Federal Rule of Appellate Procedure 28.1(e)(2)(B), in that the brief of Plaintiff-Appellee/ Cross-Appellant, CPC Acquisition, Inc., contains 9,513 words. This certification is based on the word count of Microsoft Word 2007, the word processing program used in preparing Plaintiff-Appellee/ Cross-Appellant s brief. Respectfully Submitted, Ralph J. Schindler, Jr. Attorney for CPC Acquisition, Inc. Law Offices of Ralph J. Schindler, Jr. 53 W. Jackson Boulevard, Suite 818 Chicago, Illinois Telephone: (312) Facsimile: (312) Dated: June 20,

45 CIRCUIT RULE 30(d) STATEMENT Pursuant to Circuit Rule 30(d), the undersigned counsel hereby certifies that (1) the judgment or order from which this cross-appeal is taken is contained in the appendix of Appellant s brief already before this court as required by Circuit Rule 30(a), and (2) the supplemental appendix bound with this brief contains supplemental documents permitted by Circuit Rule 30(b)(7) consisting of evidence admitted at trial and part of the record on appeal which do not exceed fifty pages, and (3) the separate appendix filed by appellant has not been included as an appendix to this brief, pursuant to Circuit Rule 30(c). Respectfully Submitted, Ralph J. Schindler, Jr. Attorney for CPC Acquisition, Inc. Law Offices of Ralph J. Schindler, Jr. 53 W. Jackson Boulevard, Suite 818 Chicago, Illinois Telephone: (312) Facsimile: (312) Dated: June 20,

46 CERTIFICATE PURSUANT TO CIRCUIT RULE 31(e)(1) Undersigned counsel hereby certifies that a searchable electronic version of the brief, in PDF format, has been furnished to the Court at the time Plaintiff-Appellee/ Cross-Appellant s Principal and Responsive Brief was filed. Also, undersigned counsel certifies that the supplemental appendix to the brief is not available in searchable digital format. Respectfully Submitted, Ralph J. Schindler, Jr. Attorney for CPC Acquisition, Inc. Law Offices of Ralph J. Schindler, Jr. 53 W. Jackson Boulevard, Suite 818 Chicago, Illinois Telephone: (312) Facsimile: (312) Dated: June 20,

47 VIRUS FREE VERIFICATION The undersigned counsel hereby certifies that, to the best of his knowledge, information and belief, the computer disk containing the Principal and Responsive Brief of CPC Acquisition, Inc. in these appeals (Nos ; ) is virus free. Respectfully Submitted, Ralph J. Schindler, Jr. Attorney for CPC Acquisition, Inc. Law Offices of Ralph J. Schindler, Jr. 53 W. Jackson Boulevard, Suite 818 Chicago, Illinois Telephone: (312) Facsimile: (312) Dated: June 20,

48 CERTIFICATE OF SERVICE I, Ralph J. Schindler, Jr., certify that he caused (1.) two hard copies of Plaintiff-Appellee/Cross-Appellant s Principal and Responsive Brief Reply Brief for CPC Acquisition, Inc., and (2.) one searchable electronic copy of the brief on computer disk, to be served by United States Postal Service delivery on June 20, 2008 to: Mr. Steven B. Towbin Mr. Allen J. Guon Mr. Gordon E. Gouveia Shaw Gussis Fishman Glantz Wolfson & Towbin, LLC 321 North Clark Street, Suite 800 Chicago, IL Respectfully Submitted, Ralph J. Schindler, Jr. Attorney for CPC Acquisition, Inc. Law Offices of Ralph J. Schindler, Jr. 53 W. Jackson Boulevard, Suite 818 Chicago, Illinois Telephone: (312) Facsimile: (312) Dated: June 20,

49 Illinois Compiled Statutes 810 Ill. Comp. Stat. 5/2-208 ADDENDUM OF STATUTORY PROVISIONS Course of performance or practical construction. (1) Where the contract for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement. (2) The express terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, express terms shall control course of performance and course of performance shall control both course of dealing and usage of trade (Section 1-205). (3) Subject to the provisions of the next section on modification and waiver, such course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance. 810 Ill. Comp. Stat. 5/9-102(a)(64) Definitions and index of definitions. (a) Article 9 definitions. In this Article:... (64) "Proceeds", except as used in Section 9-609(b), means the following property: (A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; (B) whatever is collected on, or distributed on account of, collateral; (C) rights arising out of collateral; (D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or Add - 1

50 (E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral. 810 Ill. Comp. Stat. 5/9-102, Comment g Commercial Tort Claim." This term is new. A tort claim may serve as original collateral under this article only if it is a "commercial tort claim." See section 9-109(d). Although security interests in commercial tort claims are within its scope, this article does not override other applicable law restricting the assignability of a tort claim. See section A security interest in a tort claim also may exist under this article if the claim is proceeds of other collateral. 810 Ill. Comp. Stat. 5/ Sufficiency of description. (a) Sufficiency of description. Except as otherwise provided in subsections (c), (d), and (e), a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described. (b) Examples of reasonable identification. Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) except as otherwise provided in subsection (e), a type of collateral defined in the Uniform Commercial Code; (4) quantity; (5) computational or allocational formula or procedure; or (6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable. (c) Supergeneric description not sufficient. A description of collateral as "all the debtor's assets" or "all the debtor's personal property" or using words of similar import does not reasonably identify the collateral. (d) Investment property. Except as otherwise provided in subsection (e), a Add - 2

51 description of a security entitlement, securities account, or commodity account is sufficient if it describes: (1) the collateral by those terms or as investment property; or (2) the underlying financial asset or commodity contract. (e) When description by type insufficient. A description only by type of collateral defined in the Uniform Commercial Code is an insufficient description of: (1) a commercial tort claim; or (2) in a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account. 810 Ill. Comp. Stat. 5/9-203(1) Sec Attachment and enforceability of security interest; proceeds; supporting obligations; formal requisites. (b) Enforceability. Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; (B) the collateral is not a certificated security and is in the possession of the secured party under Section pursuant to the debtor's security agreement; (C) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under Section pursuant to the debtor's security agreement; or (D) the collateral is deposit accounts, electronic chattel paper, investment property, or letter-of-credit rights, and the secured party has control under Add - 3

52 Section 9-104, 9-105, 9-106, or pursuant to the debtor's security agreement. Add - 4

53 TABLE OF CONTENTS FOR SUPPLEMENTAL APPENDIX Additional Documents Presented in the Proceedings Before the Bankruptcy Court Exhibit F, admitted into Evidence during the October 16, 2006 Proceedings Before the Bankruptcy Court (UCC Financing Statement Amendment, Filed by LaSalle Bank on August 28, 2001 with the Illinois Secretary of State) SA3 Exhibit P-17, admitted into Evidence during the October 16, 2006 Proceedings Before the Bankruptcy Court (Fax transmission from Certified to its attorney authorizing the settlement of the Rothschild claim) sa4 Add - 5

54 SA3

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