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UNITED STATES EX REL. SBA v. KURTZ

October 29, 1981

UNITED STATES of America on Behalf of its Agency, the SMALL BUSINESS ADMINISTRATION
v.
Morris I. KURTZ



The opinion of the court was delivered by: BECKER

OPINION AND ORDER

I. Introduction

 This action, brought by the United States to enforce the guaranty on a defaulted $ 400,000.00 loan made under the Small Business Administration (SBA) loan guaranty program, is before us on the parties' cross-motions for summary judgment. We first heard argument on the Government's motion for summary judgment in early 1979, and, by order filed May 17, 1979, denied that motion without opinion. However, after defendant Morris I. Kurtz filed a summary judgment motion on April 23, 1980, the Government reinstated its motion, noting that the defendant had changed his position as to whether the case turned on issues of material fact, in contradistinction to issues of law. *fn1" After additional briefing, reargument, and further reflection, the summary judgment motions are now ripe for disposition. *fn2" For reasons that we discuss at length, we will grant the Government's motion and deny defendant's motion. We turn first to a description of the factual record before us.

 II. The Facts

 On April 11, 1969, Arnold's Cleaners, Inc. ("Arnold's"), a California corporation engaged in the dry cleaning business in Los Angeles, entered into a loan agreement with the Guardian Life Insurance Company of America ("Guardian"). The loan was secured by a promissory note in the amount of $ 400,000.00 with interest at 8% per annum. The proceeds were used primarily to enable Arnold's to enter the industrial uniform rental business under the name Allstate Uniforms. Defendant, who was the president and sole shareholder of Arnold's, personally guaranteed the full amount of the loan. The loan package also included an undertaking by the SBA to guarantee repayment of the loan to Guardian. *fn3" Arnold's pledged its business machinery, fixtures, furniture, equipment, and after-acquired property as collateral for the loan. The collateral then in existence was appraised twice at the time the loan was made: once by H. B. Okey, an SBA employee, and once by an outside firm identified in the record only as "Tait." Okey valued the collateral at $ 237,500.00, while Tait appraised the same property at a value between $ 275,500.00 and $ 290,000.00.

 Arnold's was unable to make all its required payments to Guardian between September 1969 and January 1970. On December 14, 1970, because of Arnold's continuing failure to meet its obligations as they came due, Guardian made demand on the SBA for payment of the guaranteed portion of the loan. The SBA honored Guardian's demand, and, on December 17, 1970, Guardian assigned to the SBA the right to collect from Arnold's on its note or from defendant on his guaranty.

 Shortly thereafter, Arnold's filed a Petition for Arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. §§ 701-99 (repealed Oct. 1, 1979), *fn4" in the United States District Court for the Central District of California, Arrangement No. 84436. The United States timely filed its proof of claim on behalf of the SBA on May 7, 1971. On June 11, 1971, Arnold's filed a Plan of Arrangement ("Plan") for approval by the court. The Plan divided Arnold's into two separate business operations, "spinning off" the uniform rental business operated under the fictitious name of Allstate Uniforms. Under the Plan, the SBA agreed to release any security interest it held in the assets of Allstate Uniforms and in after-acquired property of Arnold's, and to accept an undertaking by the reorganized debtor to assume and pay the debt owed to the SBA according to a specified schedule. The SBA retained its security interest in the assets of the diminished Arnold's dry cleaning operation.

 The Plan required defendant to transfer all of his interest in Arnold's to four named buyers, who were to fund the arrangement by depositing $ 60,100.00 in escrow with the receiver. The Plan fixed the sum payable by the reorganized debtor to the secured creditors *fn5" at $ 379,112.32, plus 6% interest per annum on the unpaid balance from the date of confirmation. *fn6" The Plan further provided that the creditors would be paid in monthly installments equal to the greater of one half of the net profits earned by the reorganized Arnold's and the amount fixed by a specified payment schedule, until the balance was paid in full. According to defendant's affidavit, the Plan ultimately was accepted by the court and by Arnold's creditors, including the United States, over defendant's "most strenuous objection."

 The reorganized debtor made payments totalling $ 1,750.00 to the SBA between December 1971 and April 1972. In the latter month the reorganized debtor ceased operations; it made no further payments to the SBA. Arnold's assets were liquidated by sale at auction, without notice to defendant, in November 1972. From the proceeds, the sum of $ 7,867.88 was credited to Arnold's account with the SBA. On May 8, 1975, on the basis of the guaranty executed in 1969, the SBA made written demand on defendant *fn7" for payment of the deficiency. Defendant failed to pay, and on February 3, 1976, the United States filed this suit on behalf of the SBA.

 In the guaranty that he executed in his personal capacity, defendant agreed to make whole the lender on the event of Arnold's default. The guaranty contract provided that defendant "unconditionally" guaranteed payment of principal and interest according to the terms of the loan agreement, and that defendant would pay the amount due and owing "immediately" on written demand. Further, defendant by the agreement granted to the lender full discretion to deal with the collateral, without notice to him, including power to modify, extend, or excuse terms of the promissory note. The guaranty contract gave the lender the following powers:

 
To consent to the substitution, exchange, or release of all or any part of the collateral, whether or not the collateral, if any, received by Bank upon any such substitution, exchange, or release shall be of the same or of a different character or value than the collateral surrendered by Bank;
 
In the event of nonpayment when due, whether by acceleration or otherwise, of any of the Liabilities, or in the event of default in the performance of any obligation comprised in the collateral, to realize on the collateral or any part thereof, as a whole or in such parcels or subdivided interests as Bank may elect, at any public or private sale or sales, for cash or on credit or for future delivery, without demand, advertisement or notice of the time or place of sale or any adjournment thereof (the undersigned hereby waiving any such demand, advertisement and notice to the extent permitted by law), or by foreclosure or otherwise, or to forbear from realizing thereon, all as Bank in its uncontrolled discretion may deem proper, and to purchase all or any part of the collateral for its own account at any such sale or foreclosure, such powers to be exercised only to the extent permitted by law.
 
The obligations of the undersigned hereunder shall not be released, discharged or in any way affected, nor shall the undersigned have any rights or recourse against Bank by reason of any action Bank may take or omit to take under the foregoing powers.
 
....
 
The undersigned shall have no right of subrogation whatsoever with respect to the Liabilities or the collateral unless and until Bank or SBA shall have received full payment of all the Liabilities.
 
The obligations of the undersigned hereunder, and the rights of Bank in the collateral, shall not be released, discharged or in any way affected, nor shall the undersigned have any rights against Bank ... by reason of any deterioration, waste, or loss by fire, theft, or otherwise of any of the collateral unless such deterioration, waste, or loss be caused by the willful act or willful failure to act of Bank.
 
....
 
The undersigned further agrees that all liability hereunder shall continue notwithstanding payment by SBA under its Guaranty Agreement to Bank. *fn8"

 III. The Contentions of the Parties

 The SBA urges that it is entitled to summary judgment because defendant's guaranty was conditioned only on the debtor's default and the making of a written demand for payment, and these two conditions have been fulfilled. Defendant, raising four major affirmative defenses, asserts that he, and not the Government, is entitled to summary judgment. He contends first that this action is barred by the four-year California statute of limitations. Cal.Civ.Pro.Code § 337(1). Second, he characterizes the SBA's participation in the Chapter XI proceedings as an undertaking to look solely to the reorganized debtor for repayment of the loan, so that the Government is estopped from suing on the guaranty. Third, he maintains that the Plan confirmed by the bankruptcy court in October of 1971 constituted an accord and satisfaction of the original obligation of Arnold's to the SBA, so that the guaranty accompanying the original note is without continuing legal effect. Finally, he argues that even if the Government's action is not time-barred and even if the guaranty is otherwise enforceable, the SBA did not dispose of Arnold's assets in a "commercially reasonable" manner ...


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