In Re Kors, Inc.

In 1977, plastics manufacturer Kors, Inc. (debtor) negotiated financing with the Small Business Investment Corporation of Vermont (SBIC), Rutland Industrial Development Corporation (RIDC), and Howard Bank (the bank) (creditors). The bank agreed to loan funds to Kors to lease equipment from RIDC, and SBIC agreed to loan Kors working capital. SBIC loaned Kors $400,000 secured by its machinery and equipment plus any Kors leased from RDIC, which also signed the loan agreement. SBIC filed proper financing statements recording its loan. To encourage lending to Kors, SBIC and RIDC agreed to subordinate their interests to the bank or any other lender that financed additional machinery and equipment. The bank loaned $1,150,000 to Kors and RDIC as joint debtors for RDIC to buy new Rextrusion machinery that Kors leased, describing the collateral as the Rextrusion equipment and any proceeds from its disposition. The bank filed financing statements signed by RIDC but not Kors. In 1980, Kors filed a bankruptcy petition, which was converted to a Chapter 7 liquidation. The bankruptcy trustee sold all Kors’s equipment for $1,100,000. The bankruptcy court found the bank had not perfected its security interest and that the trustee had preserved the unperfected security interest for the estate and concluded the estate was subrogated to the bank under the subordination agreement with SBIC for the benefit of all the creditors. The district court reversed the determination that the trustee stood in the bank’s position under the subordination agreement and concluded the proceeds should be distributed in accordance with its terms. The trustee appealed.