Appeal from the United States District Court for the Central District of Illinois. No. 84-1300--Michael M. Mihm, Judge.
Before COFFEY, EASTERBROOK, RIPPLE, Circuit Judges.
The Pearson Bros. Company appeals the decision of the district court reversing the bankruptcy court's entry of judgment in its favor in a suit to recover the setoff of $182,209.23 from its checking account with the First National Bank in Galva. We reverse the decision of the district court and remand with instructions to the district court to enforce the judgment of the bankruptcy court.
The Pearson Bros. Company ("Pearson"), a manufacturer of equipment for the livestock industry, such as liquid manure spreaders and hog crates, is located in Galva, Illinois. In November 1979, Pearson entered into negotiations with the Bettendorf Bank and Trust Company, ("Bettendorf"), for financing of the completion of its plant expansion and for a line of credit. In August of 1981, Pearson and Bettendorf agreed upon a four and one-half million dollar loan, 90 percent of which was guaranteed by the Farmers Home Administration ("FmHA"). Both the Loan and Security Agreement between Pearson and Bettendorf, as well as the FmHA Loan Guarantee, permitted Bettendorf to enter into a "loan participation agreement."*fn1 The Loan and Security Agreement signed by Pearson and Bettendorf provided for "participation by a financial institution acceptable to [Bettendorf] and [Pearson] in one-half (1/2) of the ten percent (10%) unguaranteed portion of the loan." The FmHA guarantee specified:
"The Lender may retain or sell the unguaranteed portion of the loan only through participation. Participation, as used in this instrument means the sale of an interest in the loan wherein the Lender retains the note, collateral securing the note, and all responsibility for loan servicing and liquidation."
Shortly after the loan to Pearson was closed, Bettendorf sold a $190,000.00 participation interest in the unguaranteed part of the loan to the First National Bank in Galva ("Galva") and retained the remaining $260,000.00 unguaranteed portion of the loan.*fn2 Under the loan participation agreement, Bettendorf was responsible for servicing and collecting the loan, with both parties bearing a proportionate share of the collection expenses. No officer of the First National Bank in Galva signed any of the loan documents, nor did the bank's name appear on any of the loan documents entered into between Bettendorf, Pearson or the FmHA.
Approximately one year after the loan was closed, Pearson began experiencing financial difficulty and negotiated with Bettendorf to temporarily reduce the interest rate of the loan from 18 percent to 6 percent. Bettendorf, in turn, renegotiated its participation agreement with Galva to reflect the lower interest rate. Although the interest on the note had been successfully renegotiated, Pearson continued to experience financial difficulty and, beginning in August of 1983, failed to make four monthly scheduled payments.
On November 21, 1983, Galva wrote Bettendorf a letter pointing out that Pearson's loan was four months overdue and inquiring into the status of the loan. On that date, the unpaid amount due Galva was $182,209.23 and the balance in Pearson's checking account with Galva was approximately $236,000.00. The signature card and account agreement signed by Pearson and Galva provided in pertinent part:
"AGREEMENT CONCERNING SETOFF RIGHTS OF FINANCIAL INSTITUTIONS
Each depositor, individually and jointly, hereby acknowledges that this financial institution has the right to charge or setoff against any deposit of the depositor with this financial institution any debts or obligations owing by the depositor to this financial institution whether direct or indirect, secured or unsecured, absolute or contingent, joint or several, due or to become due, whether as maker, endorser, guarantor, or otherwise, now existing or hereafter contracted or acquired by this financial institution and wherever payable, and the interest thereon and expense, if any, which may be incurred by this financial institution in connection therewith, and this agreement shall be construed to be the consent of the depositor to make such a charge or set-off against his/her/their account(s) if consent be required by any present or future statute or law."
(emphasis added). On November 25, 1983, Galva debited Pearson's checking account in the amount of $182,209.23, the amount due Galva under the participation agreement.
Three days later, on November 28, 1983, Pearson filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code and on December 23, 1983, filed a complaint against Galva in the bankruptcy court to recover the amount of the setoff. The bankruptcy court conducted a hearing and all parties agreed that because no officer of the Galva Bank signed the loan participation agreement and the Bank's name did not appear on the document, that there was no "direct obligation" between Pearson and Galva as that term was used on the signature card and account agreement governing Pearson's ...