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NATWEST USA CREDIT CORP. v. ALCO STD. CORP.

July 18, 1994

NATWEST USA CREDIT CORP., Plaintiff,
v.
ALCO STANDARD CORPORATION and WESTINGHOUSE CREDIT CORPORATION, Defendants.


Preska


The opinion of the court was delivered by: LORETTA A. PRESKA

LORETTA A. PRESKA, U.S.D.J.

 This interpleader action presents the question of whether Alco Standard Corporation ("Alco") or Westinghouse Credit Corporation ("Westinghouse") is entitled to a priority over the right to be repaid from the interpleader funds. After a bench trial, the Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52. Judgment shall be entered in favor of interpleader defendant Westinghouse.

 FINDINGS OF FACT

 Introduction

 1. Natwest USA Credit Corporation ("Natwest") commenced the instant action by filing a complaint for interpleader on December 16, 1992 against Alco and Westinghouse. The interpleader action concerns the sum of $ 1,250,000.00 (the "Interpleader Funds"). See Amended Complaint for Interpleader P 28.

 2. On or about September 30, 1987, Toscany, Inc. ("Toscany") and Alco entered into an agreement whereby Toscany agreed to buy and Alco agreed to sell, all of the assets used or held for use in the Toscany Imports Division of Alco. See Transcript from Trial ("T.T.") at 12-13; November 3, 1987 Loan Agreement between Toscany and Natwest § 3.22 ("Joint Exhibit B").

 3. Toscany was incorporated by certain managers of Alco's Toscany Imports Division for the purpose of acquiring the assets of that division. See T.T. at 12-13, 59.

 4. Natwest was the principal lender to Toscany of funds for Toscany's acquisition and operation of the Toscany Imports Division of Alco. See T.T. at 13. Westinghouse was also a lender to Toscany of funds for Toscany's acquisition and operation of the Toscany Imports Division of Alco, but the Westinghouse loans to Toscany were subordinated to the Natwest loans ("Subordinated Loans"). See T.T. at 81.; Westinghouse Answer to Amended Complaint for Interpleader, Ex. A.

 The Loan Agreement

 5. On or about November 3, 1987, Natwest and Toscany entered into a Loan Agreement (the "Loan Agreement"). See Joint Exhibit B at 1. Toscany is referred to in the Loan Agreement as "Borrower." See id. Natwest is referred to in the Loan Agreement as "Lender." See id. Under the terms of the Loan Agreement, Natwest agreed to provide Toscany with a credit facility under which Toscany could obtain loans and other financial accommodations (collectively referred to as the "Loans") in an aggregate principal amount of up to $ 16,000,000.00 at any one time. See id., § 2.1 at 14.

 6. The Loan Agreement required Toscany to repay Natwest, and only Natwest, for all funds borrowed thereunder. See e.g., Joint Exhibit B at 17-21.

 7. The Loan Agreement defined the term "obligations" as

 
all the indebtedness, liabilities and obligations of the Borrower [Toscany] to the Lender [Natwest], of any and every kind and nature, whether or not currently contemplated, including, without limitation those arising under this Agreement and every other Loan Document including, the Credit Accommodation Obligations and any loss, cost or expense, whether heretofore, now or hereafter owing, arising, due, or payable from the Borrower [Toscany] to the Lender [Natwest] and howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct, contingent, fixed, or otherwise, including obligations of performance, and including, without limitation, principal, interest, loan fees, charges, expenses, attorneys fees, and other amounts chargeable to the Borrower [Toscany] by the Lender [Natwest], the Loans, future advances made to or for the benefit of the Borrower [Toscany], any financial accommodation extended or obtained by the Lender [Natwest] to or for the benefit of the Borrower [Toscany] by which the Lender [Natwest] issues in its own name or by which the Lender [Natwest], as customer, causes any bank or other financial institution, as issuer, to issue, a credit or letter of credit, as defined in the Uniform Commercial Code, that obligates the issuer to honor drafts or demands for payment made by any beneficiary designated under such letter of credit.

 See Joint Exhibit B (emphasis added).

 8. The Loan Agreement defined the term "indebtedness," as used thereunder, as

 
with respect to any Person, all (i) liabilities or obligations, direct and contingent, which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person at the date as of which indebtedness is to be determined, including, without limitation, contingent liabilities which, in accordance with such principles, would be set forth in a specific Dollar amount on the liability side of such balance sheet, and Capitalized Lease Obligations of such Person; (ii) liabilities or obligations of others for which such Person is directly or indirectly liable, by way of guarantee (whether by direct guarantee, suretyship, discount, endorsement, take-or-pay agreement, agreement to purchase or advance or keep in funds or other agreement having the effect of a guarantee) or otherwise; and (iii) liabilities or obligations secured by Liens on any assets of such Person, whether or not such liabilities or obligations shall have been assumed by it.

 See Joint Exhibit B at 6-7. (emphasis added).

 9. As defined under the Loan Agreement, the definition of the term "obligations" incorporates the definition of the term "indebtedness". See Joint Exhibit B at 8. As defined under the Loan Agreement, the definition of the term "indebtedness" includes any indebtedness to Natwest that would appear on Toscany's balance sheet. See T.T. at 65.

 The Guaranty

 10. Prior to entering into the Loan Agreement, Natwest advised Alco that it would not go forward with the Loan Agreement and provide the Loans to Toscany unless Alco agreed to provide a guaranty to Natwest guaranteeing Toscany's obligations under the Loan Agreement. See T.T. at 14, 20-21. Natwest made the aforementioned demand for a guaranty upon Alco because Natwest determined that the assets of the Toscany Imports Division did not provide adequate security for the Loans. See T.T. at 59-60.

 11. Alco agreed to provide the guaranty to Natwest because: (i) Alco believed that, unless it did so, Natwest would not provide the Loans to Toscany; and (ii) Alco expected to derive benefits from Natwest's Loans to Toscany. See T.T. at 60, 62; November 2, 1987 Guaranty at 1 ("Joint Exhibit C").

 12. On or about November 2, 1987, Alco executed and delivered to Natwest a guaranty ("Guaranty") wherein Alco unconditionally guaranteed, until January 31, 1991, Toscany's obligations to Natwest under the Loan Agreement and other related documents up to a maximum amount of $ 1,000,000.00. See Joint Exhibit C at 1.

 13. When Alco executed the Guaranty, it had no interest in the source of the funds obtained by Natwest to make the Loans to Toscany. See T.T. at 40.

 14. The Guaranty refers to Toscany as the "Borrower," Natwest as the "Lender," and Alco as the "Guarantor." See Joint Exhibit C at 1.

 15. Paragraph 1 of the Guaranty describes Alco's obligation thereunder, stating in pertinent part:

 
1. (a) The Guarantor [Alco] hereby irrevocably and unconditionally guarantees to the Lender [Natwest] the due payment and performance of the indebtedness and other liabilities and obligations of the Borrower [Toscany] to the Lender [Natwest], whether or not currently contemplated or now or hereafter existing, due or to become due, direct or contingent, joint, several or independent, secured or unsecured and whether matured or unmatured, including without limitation, (i) under, arising out of or in any way connected with the Loan Agreement and all of the other Loan Documents (as defined in the Loan Agreement), and (ii) the Credit Accommodation Obligations (as defined in the Loan Agreement) (all of the liabilities included in this Paragraph 1 are hereinafter collectively referred to as the "Guaranteed Obligations"). This is a guaranty of payment and not of collection, and is the primary obligation of the Guarantor [Alco]; and the Lender [Natwest] may enforce this Guaranty against the Guarantor [Alco] without any prior enforcement of the Guaranteed Obligations against the Borrower.
 
(b) Anything in this Guaranty notwithstanding, the maximum amount of the obligation of the Guarantor [Alco] to the Lender [Natwest] hereunder shall be $ 1,000,000 in the aggregate notwithstanding the aggregate amount of the Guaranteed Obligations at any time payable to the Lender [Natwest] . . .

 Joint Exhibit C P 1 (emphasis added).

 16. Under the language of paragraph 1 of the Guaranty, Alco guaranteed the entire amount of the Loans which Natwest made to Toscany under the Loan Agreement, with the maximum amount of Alco's obligation limited to $ 1,000,000.00. See id.; T.T. at 24.

 28. Paragraph 5 of the Guaranty provides, in pertinent part:

 Joint Exhibit C P 5 (emphasis added).

 17. Alco admits that, under the plain language of paragraph 5(d) of the Guaranty, Natwest had the right and authority to give Westinghouse priority over repayment to Natwest or Alco. See T.T. at 35.

 18. Paragraph 7 of the Guaranty specifically addresses and limits Alco's right to be subrogated to the rights of Natwest under the Loan Agreement. This paragraph states, in relevant part:

 
7. Notwithstanding any payment hereunder, until such time as the Guaranteed Obligations have been paid in full, the Guarantor [Alco] hereby irrevocably waives, for the benefit of the Lender [Natwest] any and all rights which it presently has, or may hereafter have, to be subrogated to the rights of the Lender [Natwest] against the Borrower [Toscany] with respect to any such indebtedness of the Borrower [Toscany] to the Lender [Natwest].

 See Joint Exhibit C P 7.

 19. As defined under the Guaranty, the term "Guaranteed Obligations" includes all of Toscany's indebtedness, liabilities and obligations to Natwest under the Loan Agreement. See Joint Exhibit C P 1(a). Toscany's indebtedness, liabilities and obligations to Natwest under the Loan Agreement include Toscany's obligation to repay Natwest for the total amount of the Loans. See Joint Exhibit B, § § 2.5-2.8, 2.11.

 20. Alco's guaranty served as collateral for the loans made to Toscany under the Loan Agreement and, therefore, any payment by Alco under the Guaranty served to reduce the total amount owed by Toscany to NatWest under the Loan Agreement. See T.T. at 82, 138-39.

 The Amended and Restated Loan Agreement

 21. In December of 1990, Natwest's Loans to Toscany were refinanced. See T.T. at 83. The refinancing occurred because Toscany was in default under the Loan Agreement and Natwest, therefore, refused to provide any further advances to Toscany under the Loan Agreement. See id.

 22. Westinghouse, which provided the Subordinated Loans to Toscany, concluded that it was unlikely that it would be repaid by Toscany for the Subordinated Loans unless Toscany continued as a viable business and generated a positive cash flow. See T.T. at 140-141. Accordingly, Westinghouse decided that it was in its best interest to negotiate a transaction with Natwest that would enable Toscany to borrow the full amount of the Loans that were to have been made available to it by Natwest under the Loan Agreement. In this way, Toscany could increase its ...


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