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In re Morris Paint and Varnish Co.

September 5, 1985

IN THE MATTER OF MORRIS PAINT AND VARNISH COMPANY, DEBTOR-APPELLANT


Appeal from the United States District Court for the Southern District of Illinois, Alton Division, No. 84 C 5089--William L. Beatty, Judge.

Author: Cudahy

Before WOOD and CUDAHY, Circuit Judges, and wright, Senior Circuit Judge.*fn*

I.

CUDAHY, Circuit Judge.

In November 1979, appellant Morris Paint & Varnish Company ("Morris") borrowed $285,000 from appellee, MidAmerica Bank & Trust Company of Edgemont ("the Bank"). This ten-year loan was guaranteed by the Small business Administration, and was also secured by a mortgage on Morris' business property. The mortgage agreement required Morris to obtain a fire insurance policy on the property, with a company and in an amount satisfactory to the Bank, which would name the Bank as the loss payee of the policy. In addition, the agreement provided that in the event of loss, the bank had the right to elect either to apply the insurance proceeds to reduce the loan or to repair and restore the premises.

Morris did obtain a policy which met the terms of the mortgage agreement. In March 1982, a fire occurred that destroyed substantial portions of the building as well as inventory. Business was interrupted for the next eight months and during this period Morris failed to make the payments due on the mortgage. The Bank loaned Morris an additional $50,000 to cover expenses relating to securing the property and the inventory, and this loan was secured by an assignment to the Bank of $50,000 from the proceeds of the insurance policy payable for inventory loss. The inventory loss was paid by the insurance carrier in September 1982, and the $50,000 loan was repaid.

On October 19, 1982, the Bank and Morris signed a Mortgage Extension Agreement, which was subsequently amended on November 5, 1982. This agreement provided for the extension of the $285,000 note, with the arrearage to be paid in a single lump sum and the interest rate increased. The extension agreement expressly stated that none of the other terms of the note or mortgage were amended. Thereafter, the insurance carrier settled the remaining claims for loss to the building and business interruption, and on November 15, 1985, issued two drafts payable jointly to Morris and to the Bank, for a total of $692,859.13. These funds were deposited in an account at the Bank.

On December 1, 1982, Morris submitted to the Bank fiscal projections for 1983, including projections for its intended use of the insurance proceeds. Morris also made payments due under the renegotiated loan. On December 14, 1982, the Bank called Morris' loan, demanding payment within two weeks. When payment was not made, the Bank satisfied the loan by transferring funds out of Morris' account on February 3, 1983. On March 16, 1983, Morris filed a voluntary petition in bankruptcy under Chapter 11.

Morris then filed a complaint against MidAmerica to begin an adversary proceeding in the reorganization case under Chapter 11, attacking under various theories the Bank's withdrawal of funds from its account to satisfy the note. The Bank responded that under the terms of the mortgage agreement it had the right to elect to apply the insurance proceeds to the balance due on the note. The bank moved for summary judgment, the parties submitted various affidavits, and thereafter the bankruptcy court granted summary judgment in favor of MidAmerica. It held that under the mortgage agreement the Bank had the right to apply the insurance proceeds to pay off the outstanding balance on the note, and that Morris was inappropriately attempting through its affidavits to use parol evidence to modify the terms of the mortgage agreement. The bankruptcy court did not consider the effect of the Mortgage Extension Agreement because it believed (erroneously) that the Bank had not signed it.

Morris appealed the bankruptcy court decision to the district court, which affirmed the grant of summary judgment in the Bank's favor, finding that Morris had failed to show any genuine issue of material fact relating to the Bank's right to apply the funds to pay off the note under the terms of the mortgage agreement. Morris Paint & Vanish Company v. MidAmerica Bank & Trust Company of Edgemont, No. 84-5089 (S.D. Ill. June 20, 1984). Morris then moved for reconsideration, arguing that Morris and the bank had orally agreed that the insurance proceeds would be used to rebuild Morris' facilities, which understanding modified the written mortgage agreement. Morris also contended that the Bank's promises and conduct to that effect estopped it from applying the insurance proceeds to satisfy the debt. The district court denied Morris' motion. It held that any oral agreement that might have been made could not modify the written contract because the oral agreement would violate the statute of frauds (a proposition which the parties agree is incorrect as applied to the circumstances of this case). It also found no evidence that Morris had detrimentally relied on the alleged oral agreement so as to be able to invoke the doctrine of promissory estoppel. Morris Paint & Varnish Company v. MidAmerica Bank & Trust Company of Edgemont, No. 84-5089 (S.D. Ill. October 1, 1984). Morris appealed and we affirm.

II.

The section of the mortgage agreement which is central to resolution of this case provides:

In the event of loss, mortgagor will give immediate notice in writing to mortgagee, and mortgagee may make proof of loss if not made promptly by mortgagor, and each insurance company concerned is hereby authorized and directed to make payment for such loss directly to mortgage instead of mortgagor and mortgagee jointly, and the insurance proceeds, or any part thereof, may be applied by the mortgagee at its option either to the reduction of the indebtedness hereby secured or to the restoration and repair of the property damages or destroyed. (Emphasis added.)

The emphasized portion of this provision without question gives the Bank the right to apply the insurance proceeds to the balance due on the note. Morris' claim that the Bank should not have applied the proceeds in that way stems from alleged oral statements by Bank representatives, and other Bank conduct, indicating the Bank's intention not to elect this option but rather to apply the proceeds to restoration and repair of the property. Morris contends that by making these statements, the Bank effectively made an election to rebuild, thereby a) waiving its contractual right to apply the proceeds to ...


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